HISTORY & READINGS at Brian Ripley's Canadian Housing Price Charts & Plunge-O-Meter

2014 Resolution

12/31/2013

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IMAGINE...

...if we stopped competing with low wage producers and turned our attention to our own failing institutions and cruddy infrastructures?

Imagine if we built armies of scientists, engineers and artists and exported value instead of drudgery.

IMAGINE (John Lennon) Recorded live at Mt. Fuji Jazz Festival '91 with Blue Note on Aug. 24-25, 1991
Bass – John Patitucci
Drums – Jack DeJohnette
Piano – Gonzalo Rubalcaba

Stress Test

12/30/2013

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The 3 Handle is Here

Look at a long term chart of the comparison between Canadian and U.S. Treasury 10 year yields and they move in the same direction sometimes over or under lapping each other depending on differences between national GDP, CPI, exchange rates and perceptions of market risk; but they track. The chart above is since January 2000 just prior to the Tech bubble collapse.

The 14 year interval produces a 4% median yield (dotted red line) and it looks like the market wants to hit it again in 2014 (the last time was 2010). Since the start of QE in late 2008, 4% has acted as resistance but for 6 years prior to QE, 4% was support and the last bounce off of the 4% red line began in 2006-07 when the U.S. housing crash picked up momentum (head fake).

Now we are getting a spike up off the more recent 200 year secular low. Is that from taper talk alone or is the U.S. housing rebound out of the 2009 pit of gloom fading as well?

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Buy Low Sell High

12/20/2013

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Big Money Tip for DIYs

Bloomberg has a good graphic on Blackstone's (world's largest private equity firm) model for acquiring a yield in real estate. I have added a couple of notes to the graphic (in yellow) as a reminder to the DIY crowd working on building their real estate portfolios that the expense side includes the labour cost of management as well as a 10% vacancy allowance.

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If I have done the math correctly, that puts the expense side of the income statement including vacancy allowance (but excluding debt service) at around 58% of gross rents.

In my May 2013 Case Study of buying a downtown Vancouver condo for a rental return; I have in the last most conservative scenario used a 5% vacancy and 5% management fee for a estimated expense excluding debt service of 39% of gross rents.

I'm willing to bet that Blackstone knows more about the real world than me so my advice to DIY real estate investors is to err on the high side when calculating your expense projections.

My last most recent comments on the current wave of big money buying up bank foreclosures are spanish-inquisition and us-housing-recovery-limited.

SCREEN TIP: If you want to view the image enlargement of the thumbnail above even bigger than the default and you are using Google Chrome as your browser, right click on the image enlargement and select "open image in a new tab" and then Ctrl + to enlarge the image even more.

Interest Rate Effect

12/20/2013

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California Dreaming

Mark Hanson makes the observation that in California, median housing prices are are down 26% from the 2006 peak but monthly payment costs are 12% MORE using today's required risk screened and documented 30 year fixed mortgage at 4.5%. (Mark's calculations here)

In Canada we don't have 30 year fixed term mortgages, but our mortgage rates are sensitive to a steepening yield curve.

Credit Growth vs 4 Metrics

12/13/2013

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Debt Fuel Ignition Failure

This 4-chart mashup looks at Canadians (households and business) continuing to vigorously pile on debt at an even steeper angle of acquisition than before the crash into the 2009 pit of gloom.

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Canadian business has been busy reducing its labour cost but not fast or deep enough to maintain productivity or create new orders greater than before the pit.

The 5 years of Canadian negative output is a surplus boon to other countries and their productivity programs.

If we are willing to increase productivity to maintain our living standard, but reject reducing our labour cost by the expedience of withering real wages, then we have to build better machines and algorithms for production. That means changing skills from low cost physical labour to comprehensive high value intellectual labour and management combined.

If we are not willing to compete on productivity, debt will take a long time to transform into equity and will be limited in its ability to leverage.

Meanwhile Canadians blithely pile on debt. Are you over leveraged? Figure it out.

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BMO Raising Rates

12/9/2013

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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.

Euro Deflation

12/2/2013

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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.