April 2010

[Ally]

Bringing down the house: the misguided policy behind the U.S. collapse

Sometimes boring is a good thing.

International Monetary Fund economist John Kiff has spent the past few months looking at how mortgage markets in various developed countries weathered the financial crisis.

His conclusion about Canada`s mortgage market: "boring, but effective."

It`s a meat-and-potatoes mortgage market. Most Canadians opt for fixed-rate mortgages, typically five years. Half of borrowers have at least 80 per cent equity in their homes.

On the lender side, a clutch of institutions dominate the Canadian market. Mortgage brokers are rare. Most mortgages are held and serviced by the same institutions that offer the loans. Mortgages are typically backed by deposits and rarely turned into securities and sold off to anonymous investors.

And most notably, government policy is neutral when it comes to owning or renting, with no tax incentive to take on debt.

Read the full article here.

 

[Ally]

RBC, Scotiabank hike mortgage rates for second time in two weeks

TORONTO — Royal Bank of Canada and Bank of Nova Scotia have hiked residential mortgage rates for the second time in as many weeks, likely sparking another round of increases from other banks at the onset of what is expected to be one of the busiest home-buying seasons in recent memory.

As of Wednesday, RBC and Scotia`s five-year closed fixed-rate home loans will carry an interest rate of 6.1 per cent, the highest since November. Those same mortgage products carried a rate of 5.25 per cent a little more than two weeks ago.

The 25 basis-point hike, announced by RBC and Scotia on Tuesday, comes fast on the heals of a 65-basis-point hike by the big banks late last month. It also comes as expectations rise that the Bank of Canada will raise its key interest rate earlier than previously thought.

Eric Lascelles, chief economics and rates strategist at Toronto-Dominion Bank`s TD Securities unit, said investors are now factoring in a 50 per cent probability that central bank governor Mark Carney will raise interest rates on June 1. Carney has pledged to keep the central bank`s benchmark rate unchanged through June, "conditional" on the outlook for inflation.

The first round of mortgage rate hikes kicked off on March 29, as RBC, TD Bank and Laurentian Bank announced the cost of their various mortgage offerings would rise between 40 and 60 basis points. RBC was the first to announce on that day as well.

A day later, Scotiabank, Canadian Imperial Bank of Commerce and National Bank of Canada did the same.

Read the full article here.

 

[Ally]

Return of global trade unbalances unlikely

OTTAWA - Global trade flows are roaring back, figures from around the world yesterday showed. The question now is whether global trade imbalances -- which some say played a key role in pushing the global economy into the financial abyss -- will resurface to haunt policymakers again.

Analysts at Barclays Capital suggest otherwise. They reckon the rebalancing underway is for real, and it will stick.

"While a natural corollary could be that global imbalances would resurface once growth and trade recover, we find no signs that imbalances are headed back to the pre-crisis world," Barclays said in a recent paper.

There are a number of factors, it says, that will keep those dreaded imbalances in check. They include cuts to government spending as developed nations get their debt levels under control, demographic trends in China that will lead to better household income and more consumption, and increased capital flows into emerging markets from fund investors seeking yield, all of which will ultimately drive up the values of those countries` currencies.

Massive global trade imbalances emerged last decade, as Asian countries, led by China, racked up huge trade surpluses and countries such as the United States ran big trade deficits. China would sell yuan and buy up U.S. Treasuries in an effort to keep its currency weak and its exports attractive.

Read the full article here.

 

[Ally]

Global oil demand to hit record in 2010

LONDON - Global oil demand will hit a record high this year, the International Energy Agency (IEA) said yesterday, revising upward consumption estimates as the world economy recovers from recession.

The Paris-based advisor to industrialized economies raised its forecast for world oil demand growth this year to 1.67 million barrels per day (bpd), up 100,000 bpd.

The agency said in its monthly Oil Market Report that world oil demand would reach an average of 86.60 million bpd this year, up from 84.93 million in 2009. The previous record high for world oil demand was 86.5 million bpd in 2007 before the onset of the global financial crisis and economic slowdown.

"There are signs of oil demand picking up in North America and the Pacific, Asia and the Middle East although consumption in Europe still looks weak," said David Fyfe, head of the IEA`s oil industry and markets division.

But the extra demand will largely be met by production from outside the Organization of the Petroleum Exporting Countries. The IEA raised its forecast for non-OPEC output in 2010 by 220,000 bpd to about 52.0 million bpd due to higher output by OECD countries. Overall, non-OPEC supply is expected to rise by about 500,000 bpd this year.

As a result, the IEA estimated demand this year for OPEC crude and stocks would fall by 200,000 bpd to 29.1 million bpd. Oil prices were largely steady after the IEA report, with benchmark U.S. crude oil futures for May trading around US$83.63 per barrel, down US71¢.

Read the full article here.

 

[Ally]

Housing market overheating: Royal LePage

here are signs that some of Canada`s major house markets have become overheated, although most others have shown a more healthy rate of moderate growth, according to a national real estate sales organization.

Prices for all key housing types were up more than 10 per cent across Canada in the first quarter on a national basis, according to the Royal LePage survey released Thursday But Vancouver and Toronto prices rose much more dramatically – about 20 per cent in some cases – and the head of Royal LePage Real Estate Services suggested they may have risen too far in those local markets.

"House sale data from the past two year period shows tremendous variances in terms of how different cities reacted to the recession," said Phil Soper, president and chief executive officer, Royal LePage Real Estate Services. "In Vancouver and Toronto, for instance, the dramatic unit sales fluctuations exhibit a significant degree of market irrationality: inordinately fearful when faced with poorer markets; and overly enthusiastic when the tables turned."

Read the full article here.

 

[Ally]

Homeowner says noise spoiled her renovation

Alice Tsoi lives alone on the ground floor of her Toronto home. She wanted to rent the upper two floors to a tenant, but couldn`t afford to hire renovators.

So she jumped at the chance to get a makeover by a TV show, Income Property, produced by RTR Media, co-owned by decorating diva Debbie Travis.

"You have a spectacular space that could be making you an excellent rental income if it were furnished properly," Karen Walters, RTR associate producer, told her.

The renovation took seven weeks and cost her $20,000 when completed last June. But Tsoi hasn`t earned a dime from her income property, which she hoped to rent out for $1,800 a month.

She says the hardwood floor above her was not installed properly and the noise gives her migraine headaches.

"The floor now has three layers of wood," she wrote to CW Media, which owns HGTV, which aired the show last November.

"It has a drum effect that sends every single footstep noise down to the main floor, making it very undesirable for living."

Read the full article here.

 

[Ally]

Canada`s trade surplus surges on commodity strength

OTTAWA — Hewers of wood, drawers of water — and exporters of oil.

That`s the Canadian economic story, updated for the 21st century, and the reason behind the country posting its fifth straight trade surplus in February.

Exports of Canada`s resource wealth led the gains in February, widening the Canadian trade surplus to $1.4 billion from $754 million in January, Statistics Canada reported Tuesday.

Exports of manufactured goods, meanwhile, remained largely in deficit.

"The big driver of the recovery in the trade surplus over the past year has been the rebound, not just in energy but in other raw materials," said BMO Capital Markets economist Douglas Porter.

It was raw materials that drove February`s biggest gains, with exports advancing 7.2 per cent to $7.9 billion, in February.

But the larger story is oil, Porter said, referring to output from Alberta`s oilsands, which has risen by a million barrels a day over the past 20 years to 1.34 million barrels a day in 2009.

Read the full article here.

 

[Ally]

Uneven growth in housing market across the country: report

OTTAWA -- Although it experienced uneven growth across the country, the Canadian housing market was generally buoyed by strong consumer demand in the first quarter of 2010, according to the Royal LePage House Price Survey released Thursday.

"The first quarter of 2010 continued where 2009 left off, with more Canadians enthusiastically participating in a rejuvenated residential real estate market," said Phil Soper, president and chief executive of Royal LePage Real Estate Services in a release. "One of the earliest sectors of the economy to return to growth after the difficult recessionary period, the housing sector has been a prime beneficiary of low borrowing costs and improving consumer confidence."

House prices were up across all key housing types surveyed by Royal LePage, with the average price of a detached bungalow in Canada rising 11% to $329,209 in the first quarter compared to the previous corresponding period. The price for a standard two-storey home rose 10.3% to $365,141 and the price for standard condominiums increased 10.9% to $228,963.

The survey, which looks at seven types of housing in more than 250 neighbourhoods coast to coast, found that there were three different trends across the country.

In urban centres -- like Toronto, Vancouver and Victoria -- prices dropped sharply but then rose dramatically to levels that exceeded pre-recessionary prices.

Read the full article here.

 

[Ally]

Flaherty stands up for Canada`s banks

OTTAWA -- Canada stepped up its fight against overzealous bank regulation Wednesday, with Finance Minister Jim Flaherty pledging to fight against new rules that could unravel the country`s unique mortgage market — one of the few to come out of the global financial crisis relatively unscathed.

Further, he has written a letter to his Group of 20 colleagues to reiterate Canada`s stern opposition to a global bank tax advocated by Britain and France and that appears to be gaining support in the United States. Instead, he threw his support behind a Canadian compromise that would be more market-oriented but ensure lenders would have access to capital in the event they run into trouble.

"We are not going to have Canadian banks disadvantaged because they performed well, and [because] we have solid system in this country — whereby systems in other countries didn`t work as well," Mr. Flaherty told reporters Wednesday.

The forceful talk from Mr. Flaherty indicates Canada plans to use its influence as a home to a well-functioning financial system in trying to shape the new global rules aimed at preventing another credit crisis that threw the global economy into a deep recession. The hardening of Canada`s opposition also reflects growing uneasiness among Canadian banks about the reforms.

Last week, two chief executives from big Canadian banks warned of changes under consideration that would alter the country`s mortgage market and encourage behaviour seen in the United States that led to the subprime crisis.

Read the full article here.

 

[Ally]

Canada`s slump no "Great Recession":StatsCan

Canada`s economic slump was far from being a Great Recession and was in fact shorter and less severe than the previous two downturns, Statistics Canada said in a report on Thursday.

The global recession that followed the 2008 financial market meltdown was dubbed the Great Recession because in some countries it marked the worst downturn since the Great Depression of the 1930s. Not so here, as Canada fared better than all other G7 nations, StatsCan said.

A combination of strong government finances, a healthy banking system, a large pool of national savings and domestic spending helped to cushion Canada from the worst ravages of the problems felt elsewhere, it said.

The economy shrank for three straight quarters, emerging from the slump last summer.

Canadas growth is now forecast to outstrip the G7 average by three times in the first quarter and twice in the second, according to a recent report by the Paris-based OECD.

During the recession, real Gross Domestic Product in Canada dropped 3.3%, compared with 4.9% in the six-quarter recessions from 1981-1982 and a 3.4% slump spread over four quarters in the early 1990s following the bursting of the technology bubble.

In terms of jobs, StatsCan also said the recession had not been unusually severe.

Quarterly jobs fell 1.8%, compared with 3.2% in the 1990s and 5% two decades ago. The unemployment rate gained 2.5 percentage points to 8.7% compared with a jump of 6 points in the 1980s and 4.2 points in the early 1990s, it said.

Read the full article here.

 

[Ally]

Bank of Canada expected to raise rates, but not yet

OTTAWA — The Bank of Canada is not expected to raise interest rates at its scheduled announcement this coming Tuesday, but it might provide clarity on its intentions on whether it will act earlier than previously planned.

The central bank`s overnight lending rate has been set at a record-low 0.25 per cent since last April, when it took unprecedented steps to mitigate the impact of the recession.

Since then, numbers on gross domestic product, employment and — perhaps most important — inflation have come in higher than expected.

This has created anticipation for near-term interest-rate hikes from the Bank of Canada.

When the central bank lowered its rate to an all-time low, it said it would keep it there until — at earliest — the second half of 2010, which starts in July. But this was "conditional on the inflation outlook," it said at the time.

Policy-makers last year did not expect core inflation to get to an annualized rate of two per cent until the second half of 2011. However, the last two consumer-price index reports had it at this level or more for both February and January.

Read the full article here.

 

[Ally]

Bank to keep us guessing on rates

OTTAWA - Traders hope next week`s interest-rate decision from the Bank of Canada settles the debate as to whether the central bank`s first rate hike in nearly three years comes in June or July.

Some observers warn, though, that the central bank might keep people guessing.

"The reality may be somewhat messier, with quite a number of viable scenarios, and the most likely outcome [is] that the central bank elects to leave both options open -- to be settled by incoming economic data," said Eric Lascelles, chief Canadian strategist at TD Securities.

It will be a big week for Mark Carney, the Bank of Canada governor, with the rate statement on Tuesday, followed two days later by the release of the central bank`s latest economic outlook, which is bound to incorporate the robust data emerging not just in Canada, but the United States and the rest of the globe.

Markets, through bankers` acceptance futures, have priced in a 100% chance that the rate hike comes in July, allowing the central bank to fulfill its conditional commitment to maintain its 0.25% rate until the end of the second quarter. But those same instruments have priced in a 50-50 likelihood of a June increase.

Pressure on Mr. Carney to move in June has mounted in recent weeks, especially on news that inflation is stronger than the central bank had forecast, and a sharp upturn in inflation expectations among firms.

Read the full article here.

 

[Ally]

Bank rate likely to remain near zero until fall: economists

TORONTO - Canada`s economy is growing at a steady clip, but not fast enough to prompt the Bank of Canada to break its conditional pledge to stand pat on interest rates until the end of June, a Reuters poll says.

The survey of around 26 economists, conducted over the past week and published yesterday, predicts the Canadian economy will emerge from recession to grow by an annualized 3.3% this year, higher than the 2.5% expected in the January poll.

But it also shows that, with recovery chugging along and after a sharp rise in the Canadian dollar, the rate of growth isn`t expected to nudge the central bank to raise rates any sooner than markets are now thinking.

The bank has kept its overnight rate at a historic low of 0.25% since April 2009 and pledged to hold it at that level until the end of June unless inflation, currently running at 2.1%, threatens to spiral out of control.

The poll`s median forecast predicts the Bank of Canada won`t raise its overnight lending rate until the third quarter ending September at 0.75%, and ending the year at 1.25%. By contrast, the U.S. Federal Reserve isn`t expected to lift rates from record lows until the fourth quarter.

"The Bank of Canada has for some time been pledging that if the inflation outlook stayed close to their projection they would hold off on a rate hike until after June 2010," said Avery Shenfeld, chief economist at CIBC World Markets.

Read the full article here.

 

[Ally]

Oil at $85 U.S. could hurt economic recovery, says energy agency

PARIS - Oil prices at $85 US per barrel could endanger the fragile global economic recovery, a senior analyst at the International Energy Agency (IEA) said Friday.

The Paris-based adviser to industrialized economies warned at the end of 2009 that oil prices above $70-80 a barrel could be risky for global economic recovery.

"The question we should ask ourselves is whether oil prices are getting to an uncomfortable level that could jeopardize the economic recovery and there is ground to argue that," Edouardo Lopez, senior oil demand analyst at the IEA, told Reuters.

Oil prices have nearly tripled from the lows near $30 a barrel seen at the end of 2008 to around $85 as investors eye signs of an economic recovery, which is boosting oil demand.

The agency said in its monthly Oil Market Report that world oil demand would reach an average of 86.6 million barrels per day (bpd) this year, a record high up from 84.93 million in 2009 as economies recover from the recession.

Growth in demand mainly came from North America, the Pacific, Asia and the Middle East, but not from Europe, with the bloc`s economy still at pre-recession levels.

Read the full article here.

 

[Ally]

A contrarian makes a call - this time, natural gas

When it comes to predicting the price of oil (CL-FT81.47-1.77-2.13%), Henry Groppe has made a long career out of zigging when others were zagging. So why should he be any different when talking about natural gas (NG-FT3.92-0.12-2.97%)?

Mr. Groppe – the octogenarian patriarch of Texas petroleum industry analysts Groppe Long & Littell – doesn`t buy the prevailing wisdom that New York Mercantile Exchange natural gas prices are dead in the water, stuck around $4 to $5 (U.S.) per million British thermal units even as demand recovers, awash in supplies and with much more on the way.

No, his analysis (and more than 50 years of experience) tells him that gas inventories are about to get a lot tighter, that new supplies are overstated, and that prices are headed north of $8 by the end of summer.

Why is he so sure he`s got it right and most everyone else has it wrong?

Because, he contends, shale gas – the previously unattainable source of vast gas supplies that has been unlocked by new high-tech horizontal drilling advancements – is not the holy grail it`s been cracked up to be. Not even close.

"Everyone thinks [shale gas] is going to solve all of our problems. There are very optimistic estimates about the economically recoverable volumes of gas from this new resource," he said in an interview last week in the Toronto offices of boutique fund manager Middlefield Capital Corp., where he`s a long-time consultant and is special adviser to the nine-month-old Middlefield Groppe Tactical Energy mutual fund.

Read the full article here.

 

[Ally]

Home Buyers face tighter rules to avoid buying what they can`t really afford

MONTREAL - Real estate agent Marcus Caporicci calls it "creative" financing and expects to see more of it when tighter qualifying rules for mortgages take effect on Monday.

The new rules are to discourage homeowners from taking out mortgages they might not be able to afford as interest rates start to rise and return to more normal levels.

"Creative financing will become increasingly popular," Caporicci said from London, Ont.

Federal Finance Minister Jim Flaherty announced the new mortgage rules in February amid warnings that some homebuyers were taking on too much mortgage debt as house prices soared across the country and could be in trouble if rates rose.

"There is no evidence of a housing bubble, but we`re taking prudent steps today to prevent one," he told a news conference in Otttawa at the time.

Since then, mortgage rates have risen nearly three quarters of a point in financial markets as investors anticipate the Bank of Canada will begin raising its own rates starting this summer.

Under the new rules, the federal government will:

-Require all homeowners meet the borrowing standards for a five-year fixed-rate loan even if they choose variable or shorter-term loans.

Read the full article here.

 

[Ally]

No-so-great recession

It is almost impossible to downplay the hysterical economic reporting that has transpired over the past year and a half. Since January 2009, "Great Recession" has been used in almost 750 articles in Canadian newspapers; 82 times in the Globe and Mail (over one and a half times a week!); 72 times in the National Post and 54 times in the Toronto Star. Expressions such as "the worst recession since the Great Depression," "the worst recession since the 1930s" and "the worst recession since the Second World War" have been used over 375 times. When TV, radio, and the internet are added, it is surprising that Canadians are not stocking up on canned food, water and other supplies in anticipation of the apocalypse.

Our politicians haven`t helped, either. Federal Finance Minister Jim Flaherty has repeatedly declared the 2008/2009 recession, "the most serious economic crisis since the 1930s." Same goes for Liberal leader Michael Ignatieff who called it "the most serious economic crisis since the Second World War." In fact, the severity and depth of the 2008/2009 recession is perhaps the only thing on which the three main federal parties agree; NDP leader Jack Layton has also called it "the worst recession since the 1930s." And let`s not forget Dalton McGuinty, premier of Ontario, who billed it "the biggest economic crisis in 80 years."

While no one should downplay the hardship that the recession has had on many Canadian families, the narrative surrounding the recession is critically important. Hysterical reporting by the media can feed Canadian`s fears and create a much longer, deeper recession than was necessary. In addition, governments across the country have seized on the current narrative to justify massive spending sprees in the name of taming the "Great Recession."

Is this really the greatest recession since the Great Depression? Not according to the data.

While there are numerous ways to measure the state of the economy and the severity of a recession, we examine changes in GDP, industrial production, employment and unemployment, using two measures of economic output to compare economic declines in Canada since 1920.

The table above presents data on the duration (number of quarters) and severity (percent decline in real GDP) of Canadian recessions since 1929. The most recent recession began with a decline in real GDP in the fourth quarter of 2008 and lasted until the second quarter of 2009. Comparing the 2008/2009 recession to others since 1929 reveals it was shorter than the recessions in the early 1990s or the early 1980s. Of the 12 recessions recorded since 1929, nine were either longer or equal to the 2008/2009 recession.

Read the full article here.

 

[Ally]

Foreclosures in the U.S. surge to record highs

Another destructive wave of foreclosures is crashing down on U.S. homeowners as banks begin to deal with the massive "shadow" inventory of bad mortgages on their books.

Defying costly government efforts to keep Americans from losing their homes, banks are foreclosing on properties and repossessing them at a record pace.

RealtyTrac reported Thursday that foreclosures reached a new high of 367,056 in March, up 8 per cent from the same month last year. Banks also took possession of a record 260,000 properties in the first quarter, up 35 per cent from a year earlier, according to RealtyTrac, which began issuing its reports in 2005. "Lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year," RealtyTrac president James Saccacio said.

The so-called shadow inventory is made up of mortgages where borrowers have fallen behind on payments, but the bank has not yet moved to seize the property. U.S. banks were under intense political pressure to stem the rising tide of foreclosures last year in the thick of the financial crisis.

Nevada, Arizona, Florida and California – the same states where the housing crisis began – continue to lead the U.S. in foreclosures. In Nevada, for example, one in every 33 homes received a foreclosure notice in the first quarter – four times the national average.

The first wave of foreclosures, which began in 2007, was mainly caused by risky subprime loans to marginal borrowers.

Read the full article here.

 

[Ally]

Beware fraudsters` dirty tricks

Be warned: Booming markets bring not only higher home prices but often a significant increase in residential real-estate fraud.

That is the word coming out of such disparate organizations as title insurance companies, mortgage insurance firms and law enforcement agencies.

"Yes indeed, we see instances of fraud rise with booming markets, especially in major cities," says Ray Leclair, vice-president at TitlePLUS, the title insurance arm of Lawyers Professional Indemnity Co., which provides lawyers their version of medical malpractice insurance.

But, he adds, real-estate fraud is not confined exclusively to any upsurge in prices. "It can also take place years after you have bought a home, at a time when homeowners would not expect it."

While there are no hard statistics on real-estate and mortgage fraud for Canada, in the United States estimates of annual losses run between $4-billion (U.S.) and $6-billion a year. In June, 2008, the U.S. Federal Bureau of Investigation had 42 working groups investigating 1,380 cases – and that was after the U.S. real-estate bubble burst.

"Industry statistics suggest mortgage fraud alone results in annual losses in the hundreds of millions of dollars," Mr. Leclair says. "In many cases there is little publicity because banks are concerned about maintaining customer confidence.

"They just quietly absorb the losses."

Read the full article here.

 

[Ally]

Busiest March ever for Canadian housing listings

Homeowners across the country are frantically planting "for sale" signs on their lawns this spring, hoping to sell at the top of the market before higher rates and tougher mortgage qualification rules temper the housing sector`s incredible recovery.

A wave of supply hit Canada`s housing market in March, with nearly 100,000 new listings. It was the busiest March on record for listings, according to the Canadian Real Estate Association (CREA).

The data suggest buyers entered the market to sidestep tougher mortgage qualification requirements that went into effect on Monday, as well as to avoid new taxes being introduced in Ontario and British Columbia this summer.

Sellers have been motivated by attractive prices – the national average was $340,920 in March, the second highest on record. Prices have rebounded 17.6 per cent in a year, after falling off through the recession.

"I understand it is an active market right now and I`ll get a better price if I move quickly," said Lori Briard, whose Ottawa-area bungalow is listed for $440,000. "We weren`t planning to sell so soon, but you have to go with what`s happening out there."

Read the full article here.