October 2010 Canadian Economic Fundamentals

[Ally]

Which premiers are the best money managers?

OTTAWA — B.C. Premier Gordon Campbell ranks No. 1 in terms of dealing with fiscal policy whereas Dalton McGuinty, premier of Ontario, is the weakest, according to an analysis conducted by the Fraser Institute think-tank released Monday.

Further, the study`s authors suggest premiers from western Canada tend to be better fiscal managers than their counterparts in central and eastern Canada.

"Of the 10 premiers we examined, Premier Campbell simply did a better job than the others of managing his province`s public finances and pursuing sound long-term economic policies," said Niels Veldhuis, Fraser Institute`s senior economist and co-author of analysis.

"Given the size of Ontario`s economy, the last-place ranking of Premier McGuinty is particularly alarming. The lesson here is that Premier McGuinty should follow Premier Campbell`s lead and stick to prudent spending increases, lower taxes, and surplus budgets."

The Ontario government has mapped a slow road to balancing the province`s books. It has projected a deficit of $19.7-billion for fiscal year 2010-11, and would remain in the red until 2017-18.

Read the full article here.

 

[Ally]

Sovereign debt outlook grim: Analysts

TORONTO -- The global economy "isn`t even close" to being out of the woods on sovereign debt, two speakers told an investment conference Monday at the Toronto Board of Trade.

Beat Guldimann, founder of Tribeca Consulting Group and former head of UBS Canada, and Alex Jurshevski, founder of Recovery Partners, distributed a co-written paper titled Sovereign Debt – Reality Finally Hits. A version presented recently by Guldimann to clients of Weigh House Investor Services reportedly "scared" attendees who heard it. Interest was similarly high Monday at the ExchangeTradedForum2010 conference otherwise focused on ETFs.

In recent decades, only two of 140 attempts at fiscal consolidation were successful, Mr. Jurshevski said, defining success as reducing the debt/GDP ratio by 10%. The two successes were New Zealand in the mid 1990s and Canada shortly after that.

Every major sovereign state was hugely indebted after the Second World War but the current situation after the 2008 financial crisis is "very different," the paper says.

"The prospects of growth in the major global economies are dim and the structural issues that need to be dealt with are so immense that overcoming them appears to be close to impossible."

Read the full article here.

 

[Ally]

The ideal crime?

Several years ago, the Bank of Montreal first noticed what it described as "irregularities" in some mortgages sold in Alberta. After conducting an internal investigation, it quietly launched a lawsuit last year that alleged a massive mortgage fraud scheme involving hundreds of people, ranging from lawyers to mortgage brokers and four of the bank`s own employees—even a Calgary MP. It also hired a forensic accounting firm to try to trace the funds. BMO claims it advanced a total of about $70 million in mortgage funds to the scheme`s architects, with its losses estimated at $30 million.

Those who work in Canada`s mortgage lending industry described the case, which only came to light earlier this year, as unusual—not because mortgage fraud is rare in Canada (police say it`s not), but because of the size and sophistication of the operation, which involved as many as 14 different interconnected groups.

BMO`s decision to file a lawsuit (in a bid to recoup its money) is also seen as an oddity, with some suggesting that banks and other lending institutions are reluctant to talk about what is believed to be a relatively easy—and lucrative—crime to commit. "If you`re a bank with 1,200 branches, they would probably say that by talking about it, they`re going to educate people on how to pull off a fraud," says Gerald Soloway, the chief executive of Home Capital Group, which sells mortgages in British Columbia, Alberta, Ontario and Nova Scotia. "I happen to feel that it is a big problem. And I, for one, would like to see more resources devoted to trying to stamp it out."

But clamping down on mortgage fraud, worth hundreds of millions of dollars annually by some estimates, is easier said than done. For one thing, nobody has any idea precisely how big a problem it is in Canada because, unlike in the United States, no one keeps national statistics on it. And the scams tend to be difficult and time-consuming for police to investigate, if they get investigated at all. But the biggest obstacle may simply be the fact that, in a booming real estate market such as Canada`s, it`s easy to pretend the problem doesn`t exist since there`s far more money to be made selling mortgages than guarding against their abuse.

Read the full article here.

 

[Ally]

Where the Jobs are

At a ULI Fall Meeting 2010 panel on "Regional Economic Drivers," moderated by Heitman Managing Director Mary K. Ludgin, Richard McLemore of MetLife Real Estate and Craig Thomas of AvalonBay Communities, Inc., attempted to answer the question "where and when will the jobs show up?"

Both panelists extrapolated current and past trends to predict the future, while noting that lower long-term job growth is most likely going to be the "new normal." Right now, McLemore postulated, the nation is in a "tentative cyclical recovery," which is already showing signs of moderating. Cyclical rebounds in employment have been occurring in the finance sector, particularly in New York and San Francisco, but hiring has been slowing lately due to uncertainty. Another rebounding sector is high-tech in cities such as Boston and San Francisco, due to ever-increasing global demand for technology. At the same time, however, jobs in state and local government are disappearing rapidly. A number of long-term structural trends inhibit economic expansion and job growth, including:

• The ongoing decline in U.S. manufacturing, due to productivity growth and off-shoring;
• The probability of further public sector job cuts; andDemographic trends, which correlate with regional performance. Cities with high percentages of young people, such as Austin, are more likely to have higher job growth.To help predict the future, Thomas presented statistics on 2010 regional job growth to date in different markets, leaving out the Federal government. Who would have thought that the fantasies created by "Tinseltown" would lead the nation out of a very real recession? As it turns out, Thomas noted, Los Angeles has led the U.S. in regional job growth this year, creating some 17,000 new jobs in the production of "content" including movies and entertainment. Other rebounding markets include:
  
  "Eds and meds" in many major cities including New York, Dallas, Washington, D.C., Philadelphia, and Chicago. Growth in this sector is due not only to the aging population but also due to medical innovator, along with the many people who are going back to school in order to improve their chances in the job market.

Read the full article here.

 

[Ally]

Rate of housing price increases slowing: Teranet National Index

OTTAWA — Housing prices continued to rise in most Canadian markets in August, but the rate has slowed considerably, according to the Teranet-National Bank national house price index.

According to the index, released Wednesday, the Vancouver index was actually down 0.4 per cent and the Calgary index 0.5 per cent. It was the second monthly decline in a row for Vancouver.

Nationally, housing prices rose 0.2 per cent in August from the previous month, "the smallest since the index began climbing 16 months ago," said Marc Pinsonneault, senior economist at National Bank Financial Group.

The index, based on sales of existing homes as recorded in public land registries, showed prices 10.4 per cent higher than in August 2009, which is the smallest year-over-year increase in six months, Pinsonneault said.

As measured from the pre-recession peak, housing prices are 6.6 per cent higher — a stark contrast with the situation in the United States, where prices are 29 per cent lower than their peak four years ago.

Read the full article here.

 

[Ally]

CREA cartel not broken yet

Buying or selling a house is -- in every sense -- a big deal. Most people thus seek expert advice and assistance. That advice comes mainly from real estate agents, who are represented by the Canadian Real Estate Association (CREA). Until now, however, the system has been designed to serve agents, and the brokers who employ them, at the expense of consumers. Studies suggest that the excess charges extorted by the industry may run into the billions. This system has now -- in theory -- been broken up by an agreement between CREA and the Competition Bureau, which was approved by members of CREA over the weekend.

The 10-year settlement follows three years of discussions and several months of "intensive negotiations." CREA fought tooth and nail to keep its tight grip on fees, and tried to insert a weasel clause under which individual real estate boards might be able to pull out of any deal. However, the two sides eventually reached an agreement in principle that, according to the bureau, "fully resolved the commissioner`s concerns." In fact, the system is still arguably rigged.

The CREA/Competition Bureau wrangle has focused on the ability of sellers to buy as much or as little service as they want when listing a home on the Multiple Listing Service, the MLS, where information is controlled by CREA. Under the agreement, sellers can now have anything from a cheap, flat-rate listing than enables them to do the sales negotiations themselves, to a "full service" deal that involves expensive hand-holding all the way through.

Read the full article here.

 

[Ally]

More homebuyers turn to mortgage brokers

CALGARY - The percentage of Canadians using mortgage brokers to buy their homes has increased significantly, according to a report released today.

The Deloitte report, Winning Strategies in the Brokered Mortgage Marketplace, said that in the 1990s mortgage brokers numbered in the hundreds and were a last resort for borrowers unable to obtain a mortgage directly from a bank or credit union.

"Over the last decade, an increasing number of viable options for borrowers have surfaced," said the report. "In addition to branch-based lenders, borrowers can now consult with the banks` own mobile mortgage specialists as well as independent brokers - while also conducting their own research online.

"In this changing and information-abundant environment, the mortgage brokerage channel has emerged as a legitimate competitor."

Read the full article here.

 

[Ally]

Home equity loans bolster RBC

While a lack of confidence in the U.S. housing market has downed dozens of banks over the past three years, a product used by confident Canadian homeowners helped Royal Bank of Canada both weather that storm and continue to grow.

The product is the home equity line of credit, or HELOC as they`re known, and Wednesday Dave McKay, head of RBC`s domestic banking operations, said it is one of the most successful products it has ever launched.

It`s basically a loan secured by the customer`s house and such loans have become a significant revenue driver since their introduction about seven years ago, as more customers look to access their home equity as a way to finance everything from new kitchens and 3D TVs to exotic holidays.

They`re "hugely popular with consumers because of the flexibility to use it for multiple purposes," Mr. McKay told reporters after an investor conference Wednesday.

"It`s [using] the equity in your home as a source of value for you to invest and to use."

Read the full article here.

 

[Ally]

Carney`s currency toolbox at the ready

Mark Carney, the governor of the Bank of Canada, said yesterday the central bank remains "concerned" over the dollar`s elevated levels as a result of tensions in currency markets and the impact it could have on net trade.

His comments came as a new forecast indicated Canadian exports would soften significantly in 2011 on weaker global demand.

As he has in the past, Mr. Carney said the central bank had "options" available, such as measures allowed under its foreign-exchange intervention policy.

"There is a heightened tension in currencies ... [and] the Bank of Canada is keeping its options in order to manage the situation, if need be," Mr. Carney said yesterday in response to a query from Bloc Quebecois MP Daniel Paille.

The governor`s remarks before the House of Commons finance committee come after he attended a Group of 20 meeting of finance and central bank governors in South Korea, where members pledged to refrain from devaluing their currencies with the aim of boosting their exports.

Read the full article here.

 

[Ally]

Carney stays positive about housing

Bank of Canada Governor Mark Carney is still concerned that home prices could drop more sharply than expected and exacerbate the growing debt burden of many households – but he doesn`t see it as very likely.

Speaking to the House of Commons finance committee Tuesday, Mr. Carney said the slowdown in housing is unfolding as the central bank expected it would, given the tighter mortgage rules brought in by the Finance Department earlier this year and the fact more Canadians are retrenching after spending and borrowing with abandon amid record-low interest rates .

Read the full article here.

 

[Ally]

Return to normal growth years off, economist warns

The Great Recession may be history, but the global economy won`t return to normalized growth rates for several years, warns a leading Canadian economist.

Glen Hodgson, chief economist at the Conference Board of Canada, told an Alberta government forum on workforce issues Wednesday that sluggish growth in Europe, Japan and the U.S. will likely cut annual global growth rates by a full percentage point through 2015.

On a longer-term basis, Hodgson said energy-rich Canada must learn to adapt to the stronger "petro loonie" as well as slower labour-force growth as aging baby boomers retire. At the same time, the country must boost productivity and encourage more innovation if it`s going to compete globally.

"We`ve basically become the Norway or the Switzerland of North America," he told about 160 attendees, representing a wide range of public and private sector organizations. "We`ll have to learn to live with a strong currency."

As for the demographic tsunami that economists have warned about for years, Hodgson said the leading edge of the storm has already arrived.

Read the full article here.

 

[Ally]

Canada`s economy rebounds in August

OTTAWA — Canada`s economy rebounded with 0.3% growth in August, led by the energy and manufacturing sectors, Statistics Canada said Friday.

The growth was in line with economists` forecasts for the month, after gross domestic product declined 0.1% the previous month.

"Oil and gas extraction, wholesale trade and manufacturing were the main sources of growth in August," the federal agency said. "Increases were also recorded in the finance and insurance sector, by real estate agents and brokers, in construction and retail trade. Utilities and forestry decreased while public sector output was unchanged."

After an initially strong rebound from the recession, the Canadian economy has been struggling to regain that pace amid a weaker housing market and an uncertain outlook for the U.S. economy — Canada`s biggest trading partner.

The Bank of Canada has dramatically revised down its growth outlook for the country, forecasting three% growth this year and 2.3% in 2011, versus previous expectations for advances of 3.5% and 2.9%, respectively.

Read the full article here.

 

[Ally]

What happens in China doesn`t stay in China

"When the US sneezes, Canada catches a cold," was a longstanding maxim hushed by plain talking economists whenever there was hint of slowdown in the American economy. But that prognosis is old-fashioned medicine these days, because the Canadian oil and gas industry is feeling much more sensitive to sniffles and coughs coming from the dragon across Pacific rather than the elephant south of the border. Events last week remind us that if China`s economy ever catches a full-blown cold, oil prices could be headed to the hospital.

Last Tuesday global equity and commodity markets felt a chill for a day when China raised its interest rates by a quarter point, barely a sneeze in terms of economic health.

Seen by markets as a remedy for arresting inflation, the tightening of China`s money supply is intended to apply mild friction to the country`s economy. By association, slowing China`s economy means that future energy consumption will also ease a bit, which is a big reason why the price of oil experienced a large, one-day, $3.50/B downward cough during last Tuesday`s trading session.

Read the full article here.

 

[Ally]

A glimmer of economic sunshine in August

The Canadian economy broke out of a bit of its worrisome slump in August, recording the highest rate of growth in gross domestic product since the spring.

But all is not sunny and dry. Our economy will need to show consistent, higher-than-average growth and so will the U.S. economy before celebration is warranted, says Doug Porter, deputy chief economist with BMO Capital Markets.

"It is encouraging but we need a few months similar to August before we can really relax," he added.

"Given the fact we are in recovery mode you would normally expect something a bit better than average, because you are making up for the ground lost during a recession," he said.

Real gross domestic product increased by 0.3 per cent in August following a 0.1 per cent decline in July, Statistics Canada reported on Friday. The boost, the highest rate of growth since March, was led by oil and gas extraction, wholesale trade and manufacturing.

Increases were also reported in the finance and insurance sector, by real estate agents and brokers, as well as in construction and retail trade, the report showed. Declines were reported in utilities and forestry. Public sector output was unchanged.

Read the full article here.

 

[Ally]

Who gets the deposit when house deals collapse?

Many readers commented on my recent article about what happens when a deal doesn`t close. They wonder what happens to the deposit.

In most agreements of purchase and sale, the buyer gives the deposit to the seller`s brokerage to be held in trust. In some agreements, the deposit can be as much as 5 per cent of the sale price. One way to ensure your buyer doesn`t back out of the deal is to demand a high deposit up front. Some agreements say the buyer is due interest on the deposit. Some don`t specify. In any case, the deposit can only be released if one of three things happen:

1. The deal closes;

2. The buyer and seller sign a release agreeing where the deposit is to be paid; or

Read the full article here.