Merrill Lynch gets it!

Merrill Lynch gets it! : (I encourage you to read the report linked here)

Finally, some one in a big position (David Wolf, Chief Strategist, Merrill Lynch Canada) published a report basically saying what this blog has been discussing for a long time:

Canada is no different than the US (or the UK): We are more indebted than they were and our housing market is tracking the US with a 2 year lag (I have discussed this recently as a 1 year and a few months lag, but this is a minor detail). Also, the report says that the lack of a credit crunch thus far in Canada is more a concern than an comfort given the impending housing crash.

In various media articles, CREA, PM Harper and CIBC denounced this view. BMO said that while they are not as pessimistic, they are cautious on housing.

In the G&M today (courtesy of Canadian Press, "Canada could face housing woes, Merrill warns")

Benjamin Tal, an economist with CIBC who has been following closely the ups and downs of the housing industry, said Wednesday he sees no “trigger” threatening Canada's housing and mortgage market.

“To see a crash in the housing market you need a trigger,” Mr. Tal said.

“The trigger in 1989-1990 was extremely high interest rates. The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada.”

Good point, Mr. Tal: I agree that a "trigger" is needed.... Hmm, maybe:

1) Biggest credit crunch since the Great Depression
2) A near crash last week in the global stock markets
3) Commodity bubble crash
4) A recession in the US and Canada
5) Falling house prices in Canada feeding into a vicious circle
6) Overprime
7) No more 0%

Take your pick...

While ML the company was nearly toast a few weeks ago, they actually have some good research these days. Their US top dawg, David Rosenberg (a Canadian, by the way) has been correctly talking about the US housing crash for years.

ML is saying what is becoming obvious. The Big Banks are talking their book so they won't say this until it is obvious. While Wolf has been one of the "no housing bubble" people until recently, he has now changed course. Perhaps the recent events at his parent company in the US woke him up to the reality of a credit crunch? Or perhaps Rosenberg has convinced him?

Q&A

Great questions of late:

Question 1:

Would you recommend getting out of money market funds regarding what has happened with these funds in the US? I'm feeling it might be best to move MM funds into short-term treasuries or bonds, but I'm not sure what to do. I can see the quality of ABCP in MM funds getting ever lower and riskier, but I'm not sure how this will affect Canadian banks.

Any advice would be highly appreciated.

I don't think it is wise for me to answer specific questions as this could get me into trouble as I am not a registered financial planner, but I will tell you what I am doing and you can draw your own conclusions. Also, please remember that this is a blog where I am spouting my opinion. All investment decisions depend on your timeframe, risk aversion and whether you can sleep at night. My views could change tomorrow and it is always dangerous to blindly follow what analysts or experts are doing. What I try to do is use my own analysis/opinion and then seek out the analysis and opinions of others (both similar and dissimilar to my own) and decide a course of action. I am honored that anyone would even ask or listen to my views.Here is what I am doing:

I am leery of most money market funds as they often chase returns by adding risk. For a money market fund, you want to have as little risk as possible. I am in the Altamira Cashperformer since it is CDIC insured (up to 100K) and in the Franklin Templeton T-Bill. I am thinking about transferring out of the Templeton T-Bill as there are some things in there that are not pure T-Bills. There are not too many choices in "safe" money market funds in Canada as most of the low MER and plain vanilla T-Bill ones are for high minimum investments (such as $250K). I am staying away from anything but T-Bills in the current environment and I think that ABCP and commercial paper is not worth the risk (just look at Lehman)

Question 2:

I have $50K in a BMO monthly income fund, which is basically ~55% bonds and the rest in Canadian Equities, with 5 of the top 10 holdings in Canadian Financials (mentioning that part makes me wince.) The money is dedicated to a downpayment on my first property, something I have been staying FAR away from since I started looking in 2006 - at least I feel I made one wise decision. Fortunately I'm not being pummeled like some of the other funds - today dropped ~1.3%. I'm not expecting to purchase property for at least one year, and most likely two. Regardless, my current instincts are telling me to stick it out and NOT PANIC. But logic is telling me to swing by the bank with a large sack.

I'm not a savvy investor by any means, but I am getting into it now and learning the ropes. But right now I'm hoping to make a wise decision before I get knocked out.

Once again, here is what I am doing: I have a lot of cash, some shorts (which went up like a rocket early in the week and tanked late in the week- not sure what I am going to do), a little gold. I still believe that we are in a bear market unless otherwise proven wrong, and so I think capital preservation is key here. A monthly income fund is probably not that bad in this environment (not sure about the particular one mentioned above since I did not do the research) but at least it seems to be holding up relatively well. Even a monthly income fund has some risks though as bonds and equities can go down together (although they seem to be in an inverse relationship at present). The key is to judge your time horizon and whether you can sleep at night. In a bear market, I believe that capital preservation is key (live to play another day). To catch the absolute bottom of a bear market is hard, but I believe that even if you miss the first 5 or 10% of the new bull and miss the 30% or so on the downside, you are way ahead.

I plan to update this blog when a new bull market has begun. I don't think that Thursday's bailout bottom was THE bottom but I will let the market decide and I will watch carefully. The best thing though is waiting to buy property as that bear market has just begun.

Spin, baby

I wrote on Friday's preannouncement:

I now expect August to be at least -5% for the country overall. My
projection of -6% to -9% by December is looking more likely and perhaps
skewed to the low side of that projection.

Today the news: -5.1% in August.

Vancouver, Victoria, Calgary, Edmonton and Windsor all negative. Toronto was barely positive (0.8%). Ottawa and Montreal keeping the number from tanking at 5.6% and 6.2% respectively.

I wrote on Friday:

And CREA will likely spin away 1) saying that the market is now balanced and a great time to buy, 2) the number is skewed by Alberta and BC and 3) this is just a
healthy correction and that Canada is nothing like the US.

The actual spin had heavy emphasis on 2 with a new take on 1 (stable/solid) and 3 (as quoted):

CREA President Calvin Lindberg. "In light of that fact, our current market can certainly be characterized as stable. The Canadian market fundamentals are still solid, and mortgage rates are still at near record low levels," the CREA President adds. "The challenge is for sellers to price their home to meet the local market realities, and for buyers to realize there is no real estate bubble that will burst and send prices to new lows."

Stable = -5.1%. I would hate to see what instable looks like....

The guy is exhorting sellers to cut their prices ("for sellers to price their home to meet local market realities") and commanding buyers to just buy already and close your eyes to the overvaluation in prices from any type of historical perspective or to the news everywhere else in the world.

I suspose that Lindberg will write you a put option on your house if he is wrong? CREA sounds desperate but words alone will not prevent the bubble from imploding. Look at Lehman...

CREA preannounces....

Funny how this slipped out Friday from the G&M "Cooling Vancouver leads fall in house price"

LORI MCLEOD AND NORVAL SCOTT September 12, 2008"

National sales numbers for August, to be released by the Canadian Real EstateAssociation (CREA) on Monday, will disclose the third consecutive monthly drop in existing-home prices and the largest decline since prices slipped in June for the first time in more than nine years.

Nationwide, the price of a resale home fell more sharply in August than the 2.4 per cent year-over-year drop posted the month before, mainly because of softness in Vancouver, the country's most expensive residential real estate market, said CREA chief economist Gregory Klump.

Sales activity fell by 53.4 per cent in greater Vancouver in August, compared with the year before, and average prices there dropped by 4 per cent for both detached homes and condo units, to $737,985 and $374,366, respectively.

In July, overall housing sales in Vancouver dropped by 44 per cent, while the average price declined by 1 per cent.

Hmmm, prices fell by 4% YoY in Vancouver in August (vs 1% in July). Since Vancouver has the highest prices in Canada, this will drag the overall number down for August.

And CREA will likely spin away 1) saying that the market is now balanced and a great time to buy, 2) the number is skewed by Alberta and BC and 3) this is just a healthy correction and that Canada is nothing like the US.

To which I will say 1) the market is beginning to become more balanced after being a sellers' market for about 7 years. Hence, we need a buyers' market for a number of years to return prices to reasonable levels (i.e. not a few months of "balance" after the biggest bull market in history)

2) Yes, Alberta and BC are dragging things down just as they brought things up in 2006/07. I expect their markets to eventually drop more than others but their crash has only begun. Wait until the foreclosures get started...

3) This is not a healthy correction and Canada is exactly like the US except with a one year lag and overprime instead of subprime

Also, notice how CREA has not updated their 5% figure for 2008. Why should we believe CREA since they have yet to admit we have a problem? The US real estate associaton did the same thing back in 2006 & 2007.

As I said before, once this storm that started in the US in 2005/06, washed up in Alberta late last year and has now spread to BC really hits the center of the universe (Toronto), it is game over for the Canadian housing market.

Plus, what has happened in recent months (and likely with only limited impact in August)?

1) The awful July employment numbers: That is likely to impact housing this fall
2) Commodity and TSX crash/correction since July: Going to make things even worse out west...
3) Credit spread widening making mortgages more expensive and harder to get
4) Fannie & Freddie, Lehman, WaMu only makes 3) worse
5) October 15th mortgage changes AND

what may happen in coming months:

6) Another huge leg down in the overall stock market

Based on the preannouncement from CREA, I now expect August to be at least -5% for the country overall. My projection of -6% to -9% by December is looking more likely and perhaps skewed to the low side of that projection. When I started this blog, I had a question mark on the title. Perhaps I can finally remove that question mark....

May numbers stink

Longtime readers of this blog may remember that back in late winter, declining sales and slowing price growth were blamed on snowfall.

The results for the three months since then have been even worse even as that snowfall has melted away.

The May sales price increase YoY was 1.1%. This was down sharply from April's 3.2%. As I wrote back in April:

I will venture a guesstimate that the national home price "increase" will be close to zero sometime this summer. And maybe then the CREA will blame the heat...

Summer starts in June and we are already close to zero. Let's wait until the June results to try to confirm my guesstimate (and see if CREA blames the heat).

Watch CREA spin (remember they have a fantasylike 5% price increase for the full year despite all the building inventory)

• "Unlike the situation in the United States, re-sale housing prices in Canada continue to increase," said CREA president Calvin Lindberg.

• "The resale housing market has evolved in just a few short months," said CREA chief economist Gregory Klump. "The record number of new listings means more opportunities for buyers.

Yes, the situation in the United States is worse RIGHT NOW. Yes, housing prices in Canada continue to increase. But, the US did not go negative right away. It took almost a year for prices to go negative once the bubble began to unwind. Our bubble only started to unwind a few months ago!

"More opportunities for buyers". Lovely how they spin a record number of listings as a buying opportunity. Yes, there are more houses available and possibly better deals than a few months ago, but this is like saying that internet stocks were a good buy one month after the dotcom bubble began to burst. The housing bubble has taken years. It will take at least a few years for house prices to remove the excesses. Not a few months....

And remember that this housing bubble is unwinding despite record oil prices (Calgary and Edmonton are now the 2 weakest markets), declining interest rates and a strong loonie and new record highs on the TSX.

It will be interesting to see the effects of this week's sharp run up in mortgage rates on the July and August numbers. I think that a negative number in either July and/or August is quite likely. And then, you may (just maybe) start to see articles in the mainstream papers similar to what you've read here since the beginning of the year.

Another Bad Month!

We got confirmation that the turn is here with the April numbers. April was a uneventful month weatherwise in most of the country, so the bulls couldn't use the snow as an excuse (except maybe in Alberta?).

I asked recently whether CREA was just making up bullish fantasy numbers as they almost ignored the huge drop off in the housing market when they revised their 2008 projections downward. They did drop their estimate of housing sales but they barely touched the all-important sales price increase (5.5% to 5.3%). I figured that since they wrote it on May 6th, they must have had at least some clue on the April numbers: Since March was up only 4% YoY, they must have seen at least some stabilization in the sales price increase to justify going with a 5.3% figure for the full year. I was thinking maybe a small uptick to 5% YoY in April...

Wrong! According to CREA's numbers, April saw a YoY increase of only 3.2%. The only good news for housing bulls was that the sales drop was only 6.1% (versus an 18% drop in March). New listings soared by 18%.

For sales to average an increase of 5.3%, we would have to get some 5-6% figures in the second half. That would require not only immediate stabilization in pricing but a pickup in price. With new listings picking up, people spending a fortune on gas and the economy slowing, good luck with that.

Let's see what May brings but I think a negative number is likely before the leaves turn this fall...

Now, can we ask the question again?

I asked the question back in February: Did we go into recession in December?

I am still waiting for the G&M or Financial Post to ask this question.

Today we got news that February GDP was -0.2%. On April 1st, I stated that based on Dec-Jan data, it appears that the economy was basically going flat. So now we can make it 3 months of basically no growth.

Can we at least start to ask the question, and also ask: If we are at zero now, and then the housing bubble and commodity bubble only began to deflate in March, how do we avoid recession?

G&M? FP?

I was wrong: The Turn is Here

WOW!! The March data from CREA was off the charts horrible...

I was wrong when I wrote this on April 8:

" Canada's turn may be coming. Clearly, the turn in Canada is not here as of March 2008. However, this does not mean that the turn isn't coming."

The snowy February numbers were not good, but they were not disastrous (a la Britain's March). I thought that March would show some deterioration over the Feb numbers, but not to this level. I wrote that line attempting to take the focus away from a myopic short term view and look to the future. Well, the future is here...

The average selling price of existing homes in March rose by only 4% YoY (down huge from 6.2% YoY in February and 11% for 2007). YoY sales number for March dropped almost 19%!!

That is a huge slowdown that has brought price increases down near to the CPI rate. This means that a house is showing almost no appreciation in real terms.

CREA had projected a national 2008 price increase of 5.5% and a slight decrease in sales to 512K (from 520K in 2007, a drop of 1.6%). Those numbers are fantasy now based on the Feb & March data.

Here is a summary of the CREA numbers (gathered from press release, articles):

	2008 Proj	2008 Q1	Feb 08	Mar 08
	Proj	Act	Act	Act
	YoY	YoY	YoY	YoY
Price	5.5%	5.5%	6.2%	4.0%
Sales	-1.5%	-13.0%	-10.0%	-18.7%

In the G&M today:

“Canada's six-year housing market boom is officially over. Aside from a few choice prairie locales, sales are melting faster than this year's snowpack,” Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a research note.

New listings (inventory) were up huge as well. March sales fell by 40% in Calgary, 34% in Edmonton and 22% in Toronto

In the G&M, it points out that Porter and TD continue to expect "moderate home-price gains" for the year. Do they really believe this or are they speaking for their bosses who hope to avoid a US style crash? Ted Carmichael of JPMorgan talks about price declines in the next 12 to 18 months in the National Post. JPM has a smaller presence in Canada, so maybe he is more free to speak his mind?

The turn is here. The chain of events that I put out last week may need revision, but I'll wait until we get further confirmation with the April numbers, as it is dangerous to rely too much on one data point.

I am not 100% sure about this (I will need to research further) but it appears that the British and Canadian housing markets are turning faster than the US market did in 2005/06. Moderate home price gains are optimistic and would require a immediate stabilization at March levels. The employment picture has slowed down big-time in recent weeks, the credit crunch effects are only beginning to be felt and the inventory has only started to build.

I will venture a guesstimate that the national home price "increase" will be close to zero sometime this summer. And maybe then the CREA will blame the heat...

Housing Bubble Bursting Worldwide

Nice article today in the NY Times (subscription required). It cites housing crashes going on (in various stages) in the US, Britain, Spain, Northern India, Ireland, Hong Kong and southern China.

Ireland's case is striking because its economy has been one of the hottest on the planet. In Dublin, prices are falling as prices simply got too high regardless of how hot the economy was. This is a lesson that those in Western Canada should heed in light of their strong commodity based economy. Vancouver with its $800K housing: look out below!The boom was worldwide and synchronized.

Why would the bust be confined to the US, which wasn't even the hottest market? And more importantly, why would Canada be exempt from the bust while fully participating in the boom? Bulls, feel free to answer these questions...

"Housing Woes in U.S. Spread Around Globe", Mark Landler, New York Times, April 14, 2008.

The Chain of Events 2007-2012

This is my big picture view of how this housing crash might play out. I am in the housing bear category as I believe that the massive increase in prices since the mid 90s would likely burst on their own. Add to the mix a global credit crunch and a Canadian recession and things could get real ugly real fast.

1. Housing Affordability declines (2007) as prices and interest rates rise. In the early part of this decade, rising prices were completely offset by generational lows in interest rates. Also, housing in Canada suffered through some lean years for much of the early 90s as the 1989 housing bubble popped and Canada suffered through a brutal recession (remember Kim Campbell saying that inflation would not drop below 10% in the 90s?). In the past few years, prices have continued to rise, while interest rates have gradually increased. Housing affordability is now at its highest since the 89/90 bubble years.

2. As affordability declines, house sales slow down, price growth slows, inventory builds. (Early 2008) As affordability declines, buyers either buy smaller, pay too much, rent or stay in their current homes. House sales slow, while inventory build due to continued new home construction and lower sales. Prices continue to rise but the momentum of the increases slow down. Financing has become increasingly dubious as 40 year amortizations are all the rage. This allows buyers to take on more debt and lower payments.

3a As inventory continues to build, certain markets begin to slow dramatically and prices actually fall. (Mid 2008?) Inventory building allows balance to return to the market and buyers have more selection. Some of the hottest market reverse as prices rise to unfathomable levels (Calgary & Edmonton?). Lenders begin to tighten their financing as they worry about some of their boom time lending practices (no down payments, low rates)

3b Making the situation worse, a global credit crunch causes most or all of the 6 main Canadian banks to cut the financing available. (Mid 2008?) 3 of the 6 main banks are already having problems (NatB, CIBC, BMO). I would be surprised if at least 1 or 2 more don't have similar problems in the upcoming months. Due to the credit crunch and an economy either near or in recession, bank mortgage lending dries up. Already mortgage rates have creeped up (despite the BoC cuts and drop in bond market yields). In addition, 3a causes banks will begin to ask for higher down payments.

3c The slowing economy leads to higher unemployment and salary freezes. (Mid 2008?) With a slowing economy, companies begin to lay off and institute hiring freezes. Bonuses are not paid. Salary increases are lowered. Consultants and other self-employed individuals lose business. These factors cause people to cut back their housing needs and in some cases sell their houses.

4 A vicious cycle ensues (Late 2008 into 2012?). 3a, 3b and 3c coincide at the same time to pop the bubble. Demand for housing is cut by high house prices, lower affordability, lower mortgage lending, tight access to credit, unemployment and declining incomes. Supply of housing increases as inventories build due to the drop in buyers. Also, new listings can increase (and thus supply) due to unemployment and foreclosures as well as sellers who want to sell before prices fall.

Prices begin to fall precipitously due to lower demand and higher supply. Once prices begin to fall, buyers tend to wait. Houses take a long time to sell as sellers are reluctant to drop prices (remembering bubble prices/not willing to take a loss). Inventories continue to build....

5 Eventually, prices bottom (2012?). Eventually, prices drop to such a low level and inventories fall as the low prices attract enough buyers. As time goes on, a new generation of house buyers enter the market. I have chosen 2012 but it could be a year or two sooner or later. These things take time. Nominal prices finally begin to creep up. However, it could take a decade or more for homes to regain their real (not nominal) prices of 2008.

Garth Turner: The boom goes bust

A terrific article written by MP Garth Turner.

A key takeaway:

"So, how different is the Canadian experience?

Not enough.

In the period between 2000 and the market crash in 2006, U.S. home prices increased 74 per cent, while household income rose by just 15 per cent. In Canada, real estate prices jumped 70 per cent by the end of 2007, with family incomes ahead 14 per cent."

Garth has been early on this housing bubble, as he has been talking about a housing correction for years and now a housing bubble. Bubbles can often take on a life of their own, and the bubble goes on longer and stronger than almost anyone expects. The doomsayers can even add to the bubble. In the Nasdaq 5000 example of 2000, many brilliant (and ultimately correct) hedge funds were decimated as their shorted tech positions went parabolic. Their short covering (buying) helped to form the top. So while Garth may have been early, I believe that he is right. Yes, the US has a subprime problem, but Canada has its own problems, as he points out.


Here is the article in its entirety:


http://www.canada.com/ottawacitizen/news/opinion/story.html?id=32b54c86-093f-472a-bdd4-8a13221e06fc

Garth Turner . The boom goes bust

How different is the Canadian experience from the conditions that caused the U.S. housing meltdown? Not enough.

Thursday, March 27, 2008

Imagine listing your home for sale, but there are no buyers. You drop the price. Again. And again. The house across the street's now for sale. And the one two doors down, plus a dozen others in a two-block radius. Nothing's selling, and every time one home is reduced, all are affected. This property used to represent wealth. Now it's a wealth trap. Most of what you have is here, and with each day passed, it diminishes.

Imagine your first home - a dream in granite and stainless. You bought it from the region's largest builder, for 1.5 per cent down - enough to cover closing costs - and mortgaged the rest. Months later, the economy turns abruptly. Your spouse loses his job and the monthly payments - mortgage, taxes, utilities - are crushing. You decide to sell, but the realtor tells you the market's also turned. Your mortgage is now slightly greater than the value of the home. After paying commission, you'll have no house, no equity, and still owe the bank more than $20,000. How could this have happened?

Far-fetched? Hardly. For millions of middle-class Americans, this is a reality as housing values collapse in the first nation-wide housing meltdown since the Depression. In some markets, prices have crashed 30 per cent. In Phoenix, there are more than 20,000 new homes, vacant, unsold and unwanted. In suburban Detroit, million-dollar properties can't fetch buyers at $300,000. Downtown, prices plunged in the first two months of 2008 by 54 per cent, to a median of $22,000.

In Florida and California, homeowners establish web sites to try and sell their homes. Three million American families now have mortgages larger than their home values. Comfortable upper middle-class families with six-figure homes find their wealth evaporated as their properties languish on the market. So many foreclosed homes are for sale, it's estimated prices will not recover for years. In fact, a recent Credit Suisse report says prices must fall another 40 per cent in Miami and 26 per cent in Los Angeles before they become affordable.

The real estate disaster now in full flower to our south is a fascinating, gripping spectacle. It's time we looked closely. Because, one way or another, it's coming here.

Canadians, strangely, believe this country's immune from the housing contagion sweeping America. The myth results from three powerful forces. Denial tops the list, no doubt the result of having more than 80 per cent of our net worth in one asset, the family home. Add to that the excellent communications job done by the real estate lobby -- mortgage-lending bank economists and the CEOs of real estate marketing companies -- who claim home values will rise forever. Finally, our belief the Americans screwed up by giving subprime mortgages to unworthy people so they could buy unaffordable homes.

But this is not so. In researching my book, Greater Fool, I was reminded again of why all booms end badly. The inflating real estate market to the south became unsustainable when average prices exceeded the ability of average families to buy homes. This inflation in turn was the result of policy decisions made after 9/11 which gave America (and Canada) the lowest interest rates in a generation. Debt was cheap, and volatile stock markets represented unacceptable risk. So, real estate became the asset of choice.

If you have any doubt, watch a few past episodes of Flip This House. It's good real estate pornography.

Prices roared to new levels and to sustain the fire, mortgage lending practices went lax. No-money-down deals were common, and home loans with discounted rates were extended to buyers who now qualified, as the bar for home ownership fell. This all made sense while the market advanced, since growing home equity gave even dodgy buyers new money to use for refinancing loans as the introductory ones matured.

But as interest rates increased, the American economy softened and realization spread that real estate was overvalued, the bubble burst - and with a vengeance.

So, how different is the Canadian experience?

Not enough.

In the period between 2000 and the market crash in 2006, U.S. home prices increased 74 per cent, while household income rose by just 15 per cent. In Canada, real estate prices jumped 70 per cent by the end of 2007, with family incomes ahead 14 per cent.

In other words, we've seen an almost identical pattern of real estate excess - familiar to anyone caught in a bidding war, or staring in disbelief at a new MLS listing. The average home in Toronto is now over $400,000, while in Vancouver it tops $700,000. Last year homes in Saskatoon raced ahead more than 50 per cent in value. A young couple in suburban Toronto with a $450,000 price limit ended up buying a $700,000 home after losing 16 competing bids.

And the Canadian response to this affordability crisis? It's called the 40-year mortgage, which lowers monthly payments by extending the amortization 15 years beyond the traditional quarter-century and, in the process, grossly inflates the total debt to be repaid. In other words, this loan (now accounting for over 40 per cent of all new borrowings) allows people to buy homes they would not otherwise afford.

Meanwhile, down payments have become almost optional. One of Ottawa's largest new home builders routinely allows young couples to move in by paying just closing costs, and financing the other 98.5 per cent of the purchase price. With virtually no equity in the home and substantial carrying charges, any market downturn means they owe more than they actually own.

So, how exactly do American subprimes differ from Canadian 40-year mortgages? How are mortgage lenders here more prudent when they allow appraisals based on postal codes, rather than actual home inspections? Why should Canadian real estate values, as inflated now as were those to the south two years ago, hold when our families are no better off? As a global economic slowdown and an American recession take hold, what impenetrable barrier is wrapped around this country?

Meanwhile, what about the future? Won't nine million house-rich and pension-challenged boomers be forced to dump billions in real estate over the coming decade? Won't runaway energy costs and the uncertainty of climate change breed a popular taste for smaller, more efficient, more urban housing, rendering four-bedroom, three-car-garage suburban palaces unsaleable?

Most of all, won't those who understand what's clearly coming, and sell now, rejoice that they found a greater fool?

Garth Turner is the MP for Halton, Ontario. Greater Fool: The Troubled Future of Real Estate is his eighth book, published by Key Porter Books. www.GreaterFool.ca

Now it is the snow!

This is Canada. With the exception of a small southern part of the West Coast, it is cold for about 6 months a year. Sometimes, it is brutally cold for weeks. It snows. Sometimes, it snows a lot. Someone should tell this to the CREA (Canada Real Estate Association).

Unit sales dropped by almost 10% versus February 2007 while new listings rose by 12%. Therefore, on the surface, supply increasing and demand decreasing. Could this be the long awaited bursting on the Canadian real estate bubble? Nah, it's just the weather?

“Snowfall in Toronto made it tough to show prospective buyers, and tough to process a listing,” said CREA President Ann Bosley. “It was one of the toughest months ever weatherwise for REALTORS® in Toronto.”

OK, we all know what happens in Toronto when it snows (remember January 1999 with Mel Lastman's army call-up). Well, then the West and Newfoundland stayed strong with $110 oil and record wheat prices, right?

Activity also softened on a month-over-month basis in Edmonton, Vancouver, Calgary, Saskatoon, and Newfoundland & Labrador.

Let's see what happens in the upcoming months. It is dangerous to extrapolate on one month's data. Let's see if the weather is used as an excuse again. Hmm, March was snowy again, in April there were floods because of melting snow, in May, it was rainy. In June, it was too hot....

The market will ultimately go where it wants to go regardless of the weather and what the CREA or I think. I believe that it will follow the US real estate market to the downside. The Canadian real estate market appears to be slowing down with inventories building (higher listings and lower sales equals higher inventories). This is in spite of the large interest rate cuts, $110 oil, record commodity prices, full employment and minimal contagion from the US problems thus far.

What happens if we get a full bear market, falling commodity prices, higher unemployment and a US and Canadian recession, as I expect? Just remember, the CREA or CMHC will never tell you that the real estate market is overvalued. They will never tell you that house prices will fall.

Prices have doubled in most Canadian markets since 2001, mortgage rates have increased over the past few years, the US real estate market is in a depression, the stock market is likely in a bear market, the population is aging, the US and Canadian economies are either in recession or near recession and a global debt deflation is underway.

Canada will be just fine. Housing will increase nicely at 5%. If you believe that, I have a few condos in Florida to sell you...

Housing Crash in 2008?

One of the few articles about the housing market in Canada that actually has a few negatives in it

The article is below:

A few points:

1) The CMHC says that December was an "extremely cold month in Toronto". Untrue! It was about normal (I looked at Environment Canada and Accuweather's website). Sure, there was a lot of snow and it was colder than normal until Dec 17th but nothing unusual. This was also true of Montreal and Toronto, but out west where all things real estate are hot, temps were relatively normal. Watch the forecast for 2008 to be quietly revised downward in the next few months. January and February were actually very warm out East so let's see if they use the weather as an excuse. The winter of 07/08 was mild and snowy out East. There were colder winters (02/03 & 03/04) in the middle of this boom! Weather is a lame excuse.

2) The industry morons in the US used to say the same thing in 2005 and early 2006. The "it's a healthy slowdown/return to single digit price increases" talk. Now we are about 10% down and probably another 10-20% to go.

3) Interest rates are creeping up despite the central bank efforts. The recent bad news from BMO on its SIV crap are likely to put it into the balance sheet cash hording mode (similar to CIBC and National). 3 of 6 national banks are likely to be lending a little more conservatively despite the Bank of Canada's interest rate cuts. This will tend to keep interest rates higher than they "should" be. Also, expect credit to be harder to get in the future with higher downpayments. This will ultimately hurt the 0% down crowd.

I don't want to put too much stock in 1 month of data. It will take a few months of data to confirm that the housing market is beginning to slow. It will probably take another month of scary stock markets and a bursting of the commodity bubble to really make it obvious.

Nothing continues forever and I just find it hard to believe that despite a credit crunch unparalleled since the 1930s, that Canada's housing market is just going to keep going up 5-10% while the US and UK (and ultimately others) will fall 20-30% and likely go in to recession. Canada will just magically decouple and things will be la-de-da... A more likely scenario is a drop in nominal and real prices for Canadian real estate, in the East and West. The East as we go into recession and the West once things cool off and the commodity bubble bursts.

Housing market's 'sky is not falling'

Garry Marr, Financial Post Published: Thursday, February 21, 2008

New-home construction slumped badly last month but Canada Mortgage and Housing Corp. says there is little fear the Canadian housing market could soon resemble the one in the United States.

On a seasonally adjusted annualized basis there were 187,500 housing starts in December, a 19.6% drop from a month earlier. Despite the decline, there were an estimated 229,600 new homes constructed last year, the second highest level of construction in the past two decades.

"No, the sky is not falling, it really was a weather-related decline," said Bob Dugan, chief economist with CMHC, noting December was an extremely cold month in Toronto, in particular, and that slowed condominium construction.

He said there are plenty of pre-sales for condominiums, which would indicate a lot of activity to come. CMHC is sticking with a forecast of 214,000 for new-home construction in 2008, the seventh straight year starts would top 200,000. One would have to go back 30 years to find a comparable run for the construction industry.

But all is not perfect. Interest rates have been creeping up and the posted rate for a five-year closed mortgage -- the most popular --is 7.59%. Rates haven't been this high since Au-gust, 2001. "They are high for recent months but not if you look at them long term," said Mr. Dugan, who said one of his concerns for the housing market was the possibility of credit drying up.

The credit crunch has not materialized as far as homeowners are concerned, but they are being asked to pay higher interest rates, which, combined with higher home prices, is affecting affordability.

"Despite earlier concerns about the potential impact of the financial market storm on Canadian housing demand, it does not appear the recent tightening in credit conditions has created an undue burden on developers and consumers, and home building clearly remains a pillar of strength in the Canadian economy," said Ritu Sapra, an economist with Toronto-Dominion Bank. "But home affordability is eroding across the nation, especially in the western provinces where it has become common to see huge annual price gains."

Major real estate firms now predict price growth in the existing home market to slow down.

gmarr@nationalpost.com

Did a Canadian recession start in December?

This is a question that few in the mainstream media are asking...

The question needs to be asked but won't since much of what passes as "economic research" in Canada is dominated by the Big Six banks, who have a vested interest in keeping up the bullish spin.

Let's examine the following facts:

1) The US is either already in a recession or dangerously close to one. 2007 Q4 GDP was about 0.6% and projections for 2008 Q1 are for similar numbers. Remember that it often takes a year or more, but these numbers are usually revised sharply lower, meaning that there is a decent chance that the US is already in recession.
2) The UK, Europe and Japan are also slowing sharply and recession is a definite possibility.
3) Canada skipped the 2001 US recession (barely) and has not had a recession for 1990/91. We are overdue as that was 17 years ago! Today's university students were still in diapers at the time.
4) All major stock market indexes are either in a steep correction or a bear market (only time will tell), including Canada.
5) Canada's economy is heavily export dependent. Over 70% of its exports go to the US. Therefore, a US recession has to have a negative impact on Canadian exports. It appears that unlike in 2001, the US consumer is finally slowing down (the 2001 recession was primarily caused by the tech bubble bursting/business investment recession- the consumer stayed relatively strong).
6) I have long thought that the strong Canadian dollar was in Canada's best interest and much of the move was justified and a net positive to Canada's overall economy. The strong loonie kept purchasing power high, and kept interest rates and imported good prices low. Also, since most of our exports are commodities priced in US dollars, the devaluation of the US dollars was more than offset by the huge price increases in those commodities. Look at oil. It was about $20US/barrel in 2002. Now it is at $100. A fivefold increase. Even though the Cdn dollar has appreciated, in Canadian dollar terms, the price of oil has risen from approx $32cdn/barrel in 2002 to $100Cdn/barrel right now. I will discuss later why the strong loonie will no longer be a help.

This recent quote taken from Bloomberg from one of those Big Six economists. At least Millan Mulraine of TD seems to be at least talking about negative GDP although the official TD forecast does not have a recession.

By Alexandre Deslongchamps ( Feb. 19 Bloomberg)

``This (wholesale sales) report adds to a long list of fairly weak economic reports for December, coming on the heels of negative manufacturing shipments and trade,'' Millan Mulraine, an economist with TD Securities in Toronto, said in a note to clients. Taken together, the data will ``drag December's gross domestic product growth significantly downwards -- quite likely into negative territory,'' Mulraine said.

Perhaps a Canadian recession is too extreme. After all, as long as commodity prices enjoy a bull market (CRB, gold, oil, wheat, platinum, silver are all near or at record highs), at least Western Canada should avoid a recession.

Perhaps only a central Canada recession should be on the table (easily more than half the population of Canada). A strong dollar is killing the manufacturing sector in Ontario & Quebec. In the long run, this hollowing out of manufacturing is likely inevitable, but in the short run, it could cause an Eastern Canada recession. When things were humming along in the US, the strong dollar effect on Central Can was offset by a multitude of factors (strong housing and retail sales, strong export markets, spillover from the Alberta boom, etc...). This is clearly a risk now.

And even Western Canada: It does not make sense to me that all these commodities are at record highs? There is a risk in the next few months, that all these commodities head lower and possibly way lower. Why? If much of the western world is at/near recession, there has to be some serious impact on demand. And at these prices, you know that supply will come on. I know about the BRIC and the lower US$ argument, but it does not justify these types of moves. It is eerily reminiscent of the tech bubble. I believe that all of the 2008 move in commodities is speculation. There is nowhere else to hide:

Google/Apple/RIMM/ all other tech: finished
Financials/Retail: dead
Healthcare/Defensive/90% of stocks: not much happening or in a bear market
LT Bonds: not attractive at these yields
Any non-government bonds: In a huge bear market

All this liquidity being pumped in by the central bankers is going into the "hot games", which are the commodities. Many of the charts (ie wheat) look parabolic. Similar to Nasdaq in early 2000. I suspect that the next downleg in the market will be brutal and will take out the commodity stocks, even gold (which should decouple from the rest later in 2008). This will bring out a wave of margin calls, hedge fund blowups etc...This coming commodities bear market (perhaps it is only cyclical) will help sink the Western Canadian economy as well. And once these prices start to fall, the at par Canadian dollar can no longer be completely offset.

If December GDP was negative and if we are negative in Q1 2008 in the US and Canada, the question should AT LEAST be asked: Is Canada in recession?

Instead, everyone says the same thing: A mild US recession will lead to a slowdown in Canada. OK, sure, then why is there talk about a 50 basis point interest rate cut by the BoC in Canada? You don't cut 50 for a "slowdown". You cut 50 because you are worried about recession. You are worried by the worst housing market since WWII. You are worried about the biggest credit crunch since WWII.

I think the answer to my question is: Yes, a recession started. My degree of confidence is definitely not 100%. However, at least the question should be asked by those in the media.All I'm asking is for a healthy debate...