Saturday, April 3, 2010

Some Random Thoughts

So we are now entering the busy Spring listing/buying season.

We enter it with our housing at all time highs, with affordability at all time lows, with rates at all time lows too and with inventory growing at 2008 levels. An interesting stew.

Apart from affordability there are several other factors that may influence housing over the next few months. I will take a quick look at each one in turn:

1) The most important could arguably be interest rates. We cannot go any lower than 0.25% (zero and 0.25% are essentially the same) the question is when do we go up.

Last week banks raised their rates. This was for several reasons. Firstly long rates which are market driven have been moving up, secondly the program of swapping insured (risky) mortgages for hard cash has come to an end:

That accounted for a $60 Billion transfer of money to banks and mortgage companies and the debts to be held on our books and assumption of complete liability by the tax-payer.

The rate increases coincided with this program ending.

Ok, so when will the B of C raise. Some say June and some say never! There have been some interesting polls conducted by banks saying how frightened and over-extended Canadians are. The latest came from RBC and had some dire statistics:

Now I always think that when a public body or large company runs a poll, they should be made to explain what their purpose was for undertaking it.

I have no idea what it was, but I do know that the banks have been in the sweet spot for the last year. They are paying their depositors almost nothing, and lending it out at 4-6%. The spread, 4-6% is remarkably high. Add in CHMC insurance and the buy-back programs and this is what is happening:

So I suspect the banks would be very happy with this state of affairs continuing. Wide spreads, assumption of much of the liability by the tax-payer. AND- Nothing like throwing a few polls out there saying Canadians will collapse with even a tiny rate hike :)

Ironically, the best the bears could hope for, is strong economic numbers and a 'whiff' of inflation to force the bank of Canada to move from these ridiculously low rates. Even India has raised and we are too frightened to. Wow!

2) The new CHMC rules will come into effect April 19th 2010. As usual everything is dragged in at a snails pace so everyone can get in and drive prices even higher. The changes are well documented on the net and I won't comment on them at length. They will affect high ration borrowers and reduce the 'rental' income that can qualify for mortgages.

They also wont allow high-ratio mortgages for rental properties if the landlord doesn't live there. Like duh! Why were they allowing this in the first place.

Why were they taking liability on tax-payers backs so someone could own rental property. If their mandate was to increase property ownership for the low income, this surely is diametrically opposite to that goal.

I suspect that like Freddie and Fannie in the US, people have forgotten what their mandate is, and they are used as another instrument to pump the economy and 'kick the can down the road', when things are slow.

3) HST, which is supposed to be introduced this summer will have an unknown effect as of yet. Right now the NDP, who rarely saw a tax they didn't like, have jumped on the band-wagon with unlikely fellow traveller Bill Van Der Zalm from the other side of politics to try and defeat HST.

They should also be asked what cuts they would make if the tax does not pass, since we are running such a huge deficit as is, and how we will deal with possible credit ratings cuts on our debt.

4) Watch unemployment. We are at 7.7% down from 8.1% thanks to the Olympics. We also have money flowing back into commodities due to China and a devalued US dollar driving investors into hard assets. It will important to see how things progress post-Olympics in April and May. An up-tick in unemployment will increase job anxiety and it SHOULD delay the purchase of their largest and most expensive asset.

So the major drivers should be cost of capital, government policies which pump up RE, demand which depends on a robust economy and rental equivalent cost.

If you can think of any that I have forgotten, speak up. There is of course foreign investors, but since I know of no accurate way of measuring that, I havn't put on my list of things to follow.

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