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Is it Time to Freak?
"The Bank of Montreal says it is raising its fixed and variable home mortgage rates by 0.1 percentage points, effective Tuesday.
" (CBC News
) They are looking at the rising bond yields
and besides they have not raised rates for the last 4 months (poor diddums) even though the Canadian Bank rate has not been raised for the last 39 months AND the CPI has plunged to 0.7%/yr.
It is not inflation that is a concern; risk is the concern even though most mortgages
are insured against default thanks to you dear taxpayer via CMHC. Your taxpaying largess has resulted in your housing cost doubling in the last decade. You have financed the greatest bubble on earth and you have subsidized the Banks via government social welfare for profit seeking global corporations who want to keep their shareholders happy.
Is it time to freak? Probably not, but it's always a good time to plan. When the spread between the BoC and the 5 year retail mortgage rate widened from April 2007 to Dec 2008, the TSX Real Estate Index rolled over and plunged into the pit of gloom.
Before you sign up for that big mortgage, make sure your household income does not have a shorter amortization than the loan. See my Affordability Page
and do an analysis of your real estate holdings to see if they can handle more expense and less income. (Yield Calculator
RISING RATES MEAN
- The cost of everything financed goes up in the private sector as well as at the provincial and municipal level.
- Unless private and government sector earnings increase, then real incomes continue eroding and less spending occurs on other stuff outside the cost of shelter.
- Less spending means less productive activity which for a global corporation is no big deal, they can move production to low wage, blind oversight environments or they can simply increase their yield on demand with or without government sanction.
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Negative Interest Rates?
This chart mashup shows the Euro Zone experiencing sudden price deflation since 2012 along with negative momentum in loan creation to the non-financial sector. Business, Industry AND Labour have no pricing power and as a result, balance sheet repair (reducing debt, increasing assets) is de rigueur in Euroland.
The European Central Bank Governing Council member Ardo Hansson said "...the ECB stands ready to cut borrowing costs further and is technically prepared to make its deposit rate negative
; charging banks to hold their excess cash at the ECB in an effort to spur them to lend it to households and companies." (Bloomberg
Unfortunately that's not the way it works. Banks lend to credit worthy customers who want to leverage debt to grow their business. If the household sector is not spending, then the business sector has less income and no incentive to expand.
As mentioned in the previous post last week (Beveridge Curve
) Canada is busy giving up national and local jurisdiction in secretive attempts to join new trade agreements with pan Pacific trading partners via TPP (Trans Pacific Partnership). The European equivalent is CETA (Comprehensive Economic and Trade Agreement) with the Euro Zone. According to Rabble
...The European Commission wanted a way to win more public contracts for EU-based multinational companies, including construction, public infrastructure and engineering firms.
The solution, which is hidden in CETA’s procurement chapter, is to permanently block all levels of government in Canada from preferring Canadian or local companies, and make it illegal to ask bidding companies from Canada or the EU to make sure a portion of goods, services or labour used to fulfil public contracts is sourced locally.
If you are a Canadian business operating in Canada and want to bid on contracts in Canada, you will eventually have to bid against all the low cost industrial and service companies in Europe, Asia, North America etal. If you are Canadian Labour, I suggest you keep retraining as time permits to the highest skill level you can accomplish because the competitive job pool in Canada is going to expand dramatically.
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Are You Qualified?
Here is a continuation of the theme that North American Labour needs to retrain that I posted about last month from the point of view of who is benefiting from wealth creation
Now, this chart mashup shows the Beveridge Curve which is the inverse relationship between the unemployment rate and the vacancy rate. It demonstrates that since the Pit of Gloom in 2009, the unemployment rate has been falling while job vacancies have been rising, BUT the counter-clockwise outward shift indicates a higher unemployment rate along the job openings curve. Employers cannot fill job vacancies either because labour is unwilling or untrained. The longer the unemployed remain so, the less likely they will fit the demands of the employer; hence the question "Are you qualified?". Can you retrain while you are idle? Can you move to where the demand for labour is? Employers are
increasingly free to locate near or attract high skill low cost labour from a giant "free trade" low barrier pool.
- 2011: McDonalds Hires 62,000, Turns Away Over 938,000 Global Applicants For Minimum Wage, Part-Time Jobs (16:1)
- 2012: Delta Air Gets 22,000 Applications for 300 Attendant Jobs (73:1)
- 2013: In China 1.2 Million Candidates Apply For 19,000 Government Jobs (63:1)
- 2013: Why did 1,701 people apply for just eight Nottingham U.K. barista jobs? (213:1)
It's another realization that the compounding effects of multilateral "trade" agreements since post WWII (GATT
1995) have been changing the value of labour. Since 1994, NAFTA
has been the arbiter of disputes via the dispute settlement system known as "Chapter 19" and members have agreed to ignore
conventional national judicial review in favour of NAFTA's panel review. The removal of dispute resolution from judicial systems is a hallmark of Capital's ability to not just lobby government but to become government. The latest but not yet manifest "trade" agreement is TPP (Trans Pacific Partnership 2010) which aims to "
liberalise the economies of the Asia-Pacific".
TPP meetings and negotiations are kept secret except for what WikiLeaks has managed to publish and ...
... anti-globalization advocates accuse the TPP of going far beyond the realm of tariff reduction and trade promotion, granting unprecedented power to corporations and infringing upon consumer, labour, and environmental interests. One widely republished article claims the TPP is "a wish list of the 1%" and that "of the 26 chapters under negotiation, only a few have to do directly with trade. The other chapters enshrine new rights and privileges for major corporations while weakening the power of nation states to oppose them." (Wikipedia)
"Downtown condos are "more a commodities play than a housing market". Charles "King Cobra" Hanes, Toronto condo broker.
CLICK IMAGE TO VIEW CBC DOC ZONE VIDEO "The Condo Game"
The Condo Game was produced by Helen Slinger and directed by Lionel Goddard and Helen Slinger.
Are you thinking of buying a condo? If you do, you should set aside money for special strata assessments that are additional to any regular monthly "contingency" strata fees. AND read this CONDO USER'S GUIDE prepared by Ted Kesik, University of Toronto building science professor.
Here is an excerpt from the
BC Housing Home Owner Protection Office website "Managing Strata Repairs FAQ
Can the strata corporation use the Contingency Reserve to fund repairs? What options are available to fund the repairs?
According to the BC Strata Property Act, monies in the Contingency Reserve Fund can be used for emergency repairs without approval from the owners. Beyond emergencies, owners must give their approval at a general meeting to use these funds.
The strata corporation has two options for raising money:
1) The strata corporation can borrow money and collect additional amounts from owners each month to repay the loan
2) Special assessments can be levied against each strata unit
Either course of action requires approval by the owners at a general meeting of the strata corporation.
What happens if not all owners are able or willing to contribute their share of the repair costs?
Once the strata corporation has approved a resolution to levy special assessments, the Strata Property Act provides remedies for those who do not pay on time. Ultimately, the strata corporation can place a lien against the strata lot requiring it to be sold and monies owing to the strata corporation are collected from the sale proceeds.
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NOPE to NIRP
Sal Guatieri, Senior Economist at BMO Capital Markets Economic Research released their North American Outlook
(Nov 13, 2013) which included a forecast for an inflation pickup and an interest rate move up on 10 year Treasury Bonds.
My chart on the Canadian 10 Year "Real" Treasury Bond Yield
indeed looks like it is in an up trend but a lot of that is from deflation, a dropping CPI. This real rate has climbed 226 bps December 2011 through October 2013.
If a major bank research group is getting ready for the beginning of the end of ZIRP, then forget about NIRP (Negative Interest Rate Policy) which has been trial ballooned
on both sides of the Atlantic lately.
Here are a few odd bullet point quotes from the BMO report that makes me wonder if BMO is actually going to sell Treasuries (price down, yield up) or if they are in the market to buy a dip:
- U.S. sequestration held back government spending, and political uncertainty hurt confidence, slowing business and consumer spending, the latter to the lowest rate in two years.
- Caught off guard by cooler demand, U.S. businesses produced far more than they sold.
- U.S. GDP growth is expected to slip below 2% in Q4 as a result of the government shutdown.
- An improving global economy will support U.S. exports (???).
- Low U.S. inflation and distorted data imply just 30% odds of a December shift in QE (taper).
- The U.S. Fed funds rate could stay put until late 2015, possibly longer if the Fed extends its forward guidance to tamp down long-term rates.
- Canadian exports have gone nowhere in the past two years and factory output continues to contract in response to an overvalued currency and sluggish global demand.
- Canadian federal and provincial governments are tightening the purse strings.
- Canadian public sector layoffs have slowed job growth this year to a below normal pace.
- Canada will quadruple its rail-loading oil terminals, possibly increasing its U.S. bound oil exports by 20%. (??? the U.S. shale energy boom continues to ... reduce oil imports)
- In most Canadian regions, housing sales are higher now than when the mortgage rules where tightened in mid-2012. (??? Nope... sales are definitely down from mid-2012 see chart)
- Bank of Canada has stopped warning about future rate hikes and opens the door for possible rate cuts if growth falters or inflation slips below the 1% (currently 1.1%)
I think the metrics to watch to determine whether interest rates rise or not in the next 12 months will be unemployment, labour participation and household earnings. If earnings rise so will aggregate demand and general price inflation; but in both Canada and the U.S. politicians argue that government deficit spending must be reduced. If the government is not spending (investing) into the economy, will the private sector pick up the slack?
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Eggs all in 2 Baskets
Government subsidizes the housing and banking industries by price fixing the cost of credit. Direct and indirect employment is disproportionately funneled into construction (see Labour Force Participation
The same story has been repeated globally and according to BMO chief economist Douglas Porter
"Canada's rising dependence on commodities trade makes it vulnerable to price declines."
Canadians do not appear to be willing to add value to their resources by developing infrastructure and manufacturing capacity.
In the mashup above, the two top charts are from SoberLook.com
and they observe:
With prices drifting steadily lower since the spring of 2011, it seems safe to conclude that commodities are not going to bail us out this time—the Super Cycle is over. While global growth will likely be just firm enough to put a floor under resource prices in 2014, Canada simply cannot rely on improving terms of trade to lift incomes further, or to turn around a weak trade performance. The dramatic rise in U.S. oil and gas production further complicates the picture by putting downward pressure on North American energy prices.
Here is what's driving this dependence on commodities exports.
Canada continues to struggle with lagging labor productivity. Anecdotal evidence suggests that businesses are avoiding opening labor-intensive operations in Canada due to high costs. As a result, manufacturing employment and output failed to grow over the past decade - and in fact have been declining. Without growth in manufacturing, Canada has been increasingly dependent on natural resources for growth... the non-energy component of Canada's trade has declined sharply over the past decade.
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Timing is Everything
Now that we are on the seasonal down ramp into the 2014 spring bottom for sales and listings
, it might be worthwhile for those Canadians who are heavily debt encumbered to look at what happens to a "C" class income generating country after their real estate bubble gets pricked by a swift change in buyer sentiment.
As for The Irish Miracle "The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it. The entire Irish episode will be studied internationally in years to come as an example of how not to do things." (David McWilliams Irish economist writer, broadcaster and journalist)
News Item CNN November 14, 2013
: Three years after turning to the EU and International Monetary Fund for €85 billion in aid, Ireland is poised to become the first bailed-out eurozone country to make a full return to financial markets.
Notice the polar opposites of the U.S. (B Class GDP) and Japan (D Class GDP) since 1Q 2000 when the DotCom bubble burst; they also experienced severe housing price deflation; Japan's slide began a decade earlier. Timing is everything.
Hat tip to Ben Rabidoux
for tweeting this excellent review of the perils of buying un-built real estate. Time is a huge risk if market prices do not rise; then the risk of negative yield takes over. Calculate your yield
David's Sample Pre-Constructed "Condo" and the road to attempting to sell the assignment:
- $500,000 Original Purchase Price on a 714sf Toronto Condo ($700/sf) and after 12 months, the assignment is offered for sale with the following costs included in the price:
- $12,200 Ontario Land Transfer Tax
- $18,000 Closing Costs (can be much higher; read fine print)
- $25,000 Realtor Fees
- $3,000 Legal Fees
- $9600 Occupancy Fees
- $567,800 New Asking Price a 13.6% increase based on hard costs (now $795/sf) and in direct competition with the developer who can offer incentives to a buyer for the same or better unit.
CLICK Francisco Goya 1799 from Los Caprichos
Trick or Treat
I have reported in the past (July 24, 2013) on big money buying up swaths of bank owned U.S. residential properties in the last 2 years for buy, hold and flip when capital gains return despite current negative yields.
is reporting that:
"Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S. is using its experience to replicate the model in Spain where property prices have dropped 40 percent
A few quotes from the Bloomberg
The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.
While Spain traditionally has a lower percentage of renters than the U.S., the (Spanish) government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.
Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to rent (rather than own) and (banks) to attract foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.
Blackstone (in the U.S.) is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.
Oh, did I mention that the wire services have reported that Spain is officially "out of recession" according to the Madrid-based Bank of Spain: "Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years."
Happy Halloween, here's some Wikipedia reading:
...and here is Richard Wilkinson's Ted Talk (2011): How economic inequality harms societies. The hard data on economic inequality shows what gets worse when rich and poor are too far apart; real effects on health, lifespan, even such basic values as trust. "If Americans want to live the American dream, they should go to Denmark".
“We really can't forecast all that well. We pretend that we can but we can't.
And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.”
Alan Greenspan, speaking to Jon Stewart
(at 6.20min) on The Daily Show. More quotes from this interview (paraphrased):
Alan Greenspan was Chairman of the U.S. Federal Reserve from August 1987 to January 2006. Vancouver has been screwy since the spring of 2005 when commodity markets launched bringing other physical and paper assets along for the ride as private sector investors and government managers abandoned fundamentals.
- The banks did not fully understand the risks out there.
- We analysts thought the actors would be rational.
- We couldnt believe their (bank's) leverage.
- You cannot tell which are the toxic assets.
- Let banks suffer the consequences, don't let them default.
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