Making sense of the Housing numbers

Here are a few random thoughts that are passing through my brain....I am afraid it will be a bit long.

1) As I mentioned a few months ago, as soon as the Provincial election was over, the Liberals would start admitting that their budget forecasts were too rosy. Well here we are just over a month after the election and our premier is starting the process of fessing up.

As Vaughn Palmer wrote in one of the local papers.."Campbell is talking about holding the line on a relatively modest deficit at a time of economic decline, crashing revenues and escalating costs."

It will just be a matter of time before they are forced to start some major cuts or give up on any pretence of minor deficits, never mind balanced budgets.

2) OK so I got one thing right. What I didn't expect was the strength of the rally in assets. All assets. Oil, R.E. (in Canada) and Stocks. Given that we came back from the brink of financial Armageddon, by the tax-payer assuming huge swaths of liability, a bounce was likely. However what we got was more sustained than I had expected.

The RE Bear's case has always been that RE worldwide was grossly over-valued.

This was particularly the case in the US, where it was so over-leveraged and so much of it was held in speculative hands. However it stretched to the UK, Spain, the Baltics, Central America and of course Canada, especially YVR.

Everywhere else on the bubblesphere, prices have dropped, in many cases dramatically. In the US, the Case-Shiller housing index has dropped to late 2002 levels. In some parts of Europe where the bubble was most inflated, prices have dropped as much as 20% or more in the last year alone...http://www.globalpropertyguide.com/Europe/Spain/price-change-1-year

Meanwhile in Canada some cities like Montreal and Ottawa are at new highs, and Toronto is flat.

In YVR after the sudden huge drop in fall, we stabilised and have started to make a small recovery. We had a sizzling June for sales. How is that possible?

My reasoning is this....the crisis hit the US first as they had been the most irresponsible in lending. We were still doing OK as they started to collapse, due to several factors;

a) The usual lag between the US and Canada. We have contracts in place that have to be worked through.
b) Our lending was (comparatively) more responsible.
c) We were protected by the resource sector, even with the battering it took over the last 18 months.

As the US economy dropped, the Fed desperately cut rates and our rates followed down (after all we cannot afford to have any strength in the Canadian dollar...eh?) We also had Federal panic measures like the home renovation grants and various stimulus packages.

The result was that we had two separate economies.

The first were the folks getting laid off in manufacturing and forestry...and buying a house was the last thing on their mind.

Then there was the other 92% of the work force who were employed, still getting paid pretty well, and who saw the price of many things dropping - like gas and travel and cars -and then this wave of interest rate easing hits them.

The lower cost of borrowing allowed them to buy an extra 40% more home (30% from lower mortgage rates + 10% from lower prices). I have shown you in previous posts how the rate cuts made housing a lot more affordable, even without the price drops.

Who wouldn't jump at the chance to get on the housing band-wagon or to move up. (obviously not us bears :) )

It is no coincidence that the Government and head-office cities of Ottawa, Montreal and Toronto, where employees feel the most secure in keeping their jobs, had the most price gains, while the entrepreneurial cities of Calgary and Edmonton had price drops. http://www.chpc.biz/

What now?

I think we are now in the calm that is the eye of the storm. That is when those who have not been affected breathe a sigh of relief and then get hit by the other side of the storm.

It is inconceivable to me that our major trading partner, the US is in such dire circumstances and we should get by relatively unscathed.

Remember Canada exports greater than 30 x more to the US than to China. Most of our trade with China is imports.

My Guess

I think we will soon have the second leg of the severe recession starting. I expect the markets and assets to roll over again. When? I think it could be anytime from now until early fall. As an economist once said.."You can ask me what or when, but not both!"

If so, I think that commodities will also roll over once again and it will be our turn in the barrel. The only problem is, we will have already fired all our bullets..no more easing is possible, Federal and provincial debts are climbing rapidly and stimulus packages will be spent.

I expect the Provincial fiscal position to be a LOT worse this time next year and for the government to be looking at health and education (2/3rds of the budget) cut backs to make up for the Olympics and income hole.

RE is just another asset and is about as over-priced relative to income and purchasing power as ever, so IF the weakness that I expect starts anew, we should expect RE to roll-over in Fall and keep going down after the winter Olympics.

However I didn't expect the up-tick that started in March to last this long, so as always, take my opinions with a large bag of salt.