Tuesday, December 15, 2009

End of Year post

Well 2009 didn't quite pan out as we had expected. It started OK for those of us hoping for reasonable house prices in our city and Province. By the end of 2008, demand had completely collapsed with the MOI near 20. Compare that with 4 +/- now.

However the central banks and governments made a herculean effort to turn things around. Having ignored all these bubbles on the way up, and in fact helped inflate them, they threw caution to the wind.

Buying bad loans from banks, cutting interest rates to zero and in Canada doubling the CHMC's capacity to insure loans. How smart is that??? Encourage people with limited resources to access funds, when prices are high, when unemployment is starting to rise and when interest rates are at historic lows! Exactly what happened in the US. Maybe, just maybe too many policy makers are from Goldman Sachs...like Mark Carney, and Hank Paulson and Robert Rubin and dozens of other decision makers.

As I mentioned in a post early in 2009, the combination of lower mortgage rates and the 15% or so price drops meant that the actual carrying cost of an Average Vancouver property was 30-40% lower.

That was enough to bring people flooding back and we have had another boom in house prices.

Almost every bank economist and even Mark Carney at the Bank of Canada have warned on bubbling home prices. Duh..what do you expect? It would be like inviting your buddies to an all-you-can-eat ribs buffet and then reminding them of their bulging midriffs. They aren't going to hear you.

Rosenberg, the permabear, says the risk for mortgages has been shifted from the banks themselves who are happily gorging on the steepest yield curve for twenty years - ie they pay almost nothing to borrowers but lend long at much higher rates- while the CHMC will pick up the lion's portion of the losses, when and if they occur.

Here are some of my thoughts:

1) House prices have increased at a rate twice as fast as family incomes since 2002.

2) House prices in Canada are up 80% since 2002

3) In the US and Europe, consumer debt to income levels are dropping, as debts get paid by a chastened consumer. In Canada it is still rising.

4) In Vancouver we have been in a pressure cooker for prices for several years. Olympic build out and hype, low interest rates, relative lack of land, population growth and speculation have all fed the frenzy.

However ironically we have not been able to surpass our previous highs (yet) while many other cities in Canada who have not faced these events ..have and are.. hitting all time highs. Even in Ontario which has seen it's manufacturing base badly damaged.

This suggest that interest rates are the most important factor.

It certainly walks and talks like a bubble and does not seem sustainable to me. Unfortunately as a species we are not too concerned with sustainability. The wise thing to have done would have been to use tax and fiscal policy to try and slow down the rise in house prices. Instead they have done the opposite and are now faced with a monster which if disturbed will cause major collateral damage to everyone, even the prudent.

So it would seem that interest rates are the main driving factor.

Well short rates cannot go any lower, so they are 'as good as it gets'. Long rates have been drifting up in the US and I suspect will start drifting up here too. Who wants to be paid 3.5% for a ten year bond. Not me.

I have no forecast for interest rates, but will watching them closely. Generally speaking, short rates are set by the Central banks and the bond markets decide long rates. However there is so much manipulation in the market, with Central banks buying bonds long bonds to keep long interest rates down, and keeping short rates too low (some say 4% too low) for too long, inflation be damned, that they don't make sense.

Remember Greenspan - the previous Fed Chairman, he told folks to go short and variable in their mortgages, and then proceeded to raise rates 16X!! Basically pushing everyone who listened to him into foreclosure. It was as if he was a Manchurian candidate planted by another country to destroy the US.

Well it seems to me like a lot of folks are doing a Greenspan here. They look at their 2.5% short term rate and can afford the payments, but if rates were to suddenly move up by 2-3% they would be calling the CHMC to pick up the keys and then we would all pick up the cost.

They say predictions are only made by fools, so here is mine:

All assets are linked now. Gold and stocks and commodities. Until they keep rising , our RE will also have a strong bid. Some of this is fear unwinding, some is our old friend speculation coming back. A lot is based on the US dollar carry trade...borrow US dollars for next to nothing and buy something, anything.

When and if this all unwinds, then fear will return and folks will see their homes once more as a burden to carry and not path to life-long financial freedom.

When will that happen? Will it even happen? We shall see

Happy holidays to you all. May you have a prosperous and healthy New Year.

Wednesday, December 2, 2009

Help for broadcasters- off topic.

Regular readers know that my pet peeve is the broadcasters, like Canwest Global, who got themselves into a mess by buying assets at the top and then when they cannot service the loans, asking for Federal help (aka bail-outs) or money from the cable companies (which will probably come out of our hides in the form of higher cable fees).

The irony of a right-wing organization like Canwest, which through the National Post used every opportunity to slam unions and bail-outs, and promoted the free-market devoid of government intervention, asking for this is beyond bizarre.

If your business fails- you close down and someone else buys your assets and gives it a shot. You don't ask for government help or demand contracts be renegotiated with other succesful businiesses.

In any case the CRTC is asking for feed-back here:


This is what I submitted. It took me a few minutes to do so.

Please CRTC DO NOT give in to the pressure from the TV Monopolies. I am a small businessman and if I mess up, over-extend myself and get into financial trouble, I have to deal with the consequences, which include possible bankruptcy.

No one will come to my aid.

However, the TV companies over-paid for assets, over-paid their executives and now are complaining that if we dont face an extra tax to support them they will shut down local programming.

What a farce! Maybe I would be more receptive if they gave an undertakeing to cut their mutimillion dollar purchases of US programming and promised to cap executive pay in the future.

Our media ownership is far too concentrated. Let them break up and others will take over. If necessary the small independants can be funded,but please dont send our money into a big black corporate hole.

Stand up for the Canadian programming and for diversity of ownserhip and views.


BTW - do we need more competition in the cable space too, you betcha. They are already scooping up a bigger share of the internet and cell phone markets too.

Ok you squeeze another post out of me...

Anon said:

"In Nov 2008, we almost had a great depression. That is what it took to bring the prices down.

Now we are much higher. Anyone guess what it's going to take for an encore? Probably nothing, hence if prices do drop it will be 5-10% at MOST."

He/she has a point. The rebound has happened at lightening speed. Look at Japan for example. When their RE bubble started to burst in 1992, interest rates were cut aggressively, and stayed low. In fact the cutting started just before the bust got going.

However once it started there was nothing that could prevent the drop. However here and in the US, our governments have also cut interest rates to the same absurdly low levels and while it hasn't done much for US housing, our prices have reignited again.

The two charts above show the price of Japanese RE and interest rates: