Entries from September 2008 ↓

Colour this the nightmare scenario for George Bush and the American political establishment. The American Congress has reached a total stalemate on the passage of the $700 billion bailout of Wall Street. At this hour, the bill has been technically defeated, a development which has caused the Dow to sag more than 500 points and the TSX to plunge over 800 points.

This comes just hours after three more banks failed – one in the US, one in Britain and another in Europe. Without the bailout, American leaders are warning of the possibility of Depression-like consequences, including the failure of dozens, perhaps more than a hundred, banks.

Congress is paralyzed at the moment, as members horsetrade in the corridors and hallways, with the White House desperate to find enough votes to get this deal done. With the US Presidential election less than 40 days away, this has the potential to be a game-changing development of historic proportions, virtually guaranteeing the defeat of Republican John McCain, and seriously hobbling the coming presidency of Barack Obama.

If Congress does not pass this bill when it comes before the legislature once again, the market drop seen thus far will pale in comparison to the consequences at the end of the day.

From the Globe and Mail, and wire services:

Mr. Bush and his economic advisers, as well as congressional leaders in both parties had argued the plan was vital to insulating ordinary Americans from the effects of Wall Street’s bad bets. The version that was up for vote Monday was the product of marathon closed-door negotiations on Capitol Hill over the weekend.

“We’re all worried about losing our jobs,” Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. “Most of us say, ‘I want this thing to pass, but I want you to vote for it — not me.’ “

With their dire warnings of impending economic doom and their sweeping request for unprecedented sums of money and authority to bail out cash-starved financial firms, Bush and his economic chiefs have focused the attention of world markets on Congress, Mr. Ryan added.

“We’re in this moment, and if we fail to do the right thing, Heaven help us,” he said.

From the Wall Street Journal:

Investor sentiment on Monday also suffered a blow from aggressive selling in European markets after four financial institutions there sought rescue plans. Three governments bailed out Fortis, the U.K. government nationalized mortgage lender Bradford & Bingley, Germany’s Hypo Real Estate Holding was rescued by a consortium, and Iceland stepped in to save a local bank. All major European indexes were down more than 4% , with financial stocks leading declines.

The troubles in Europe sent the dollar rallying against the euro and the British pound. The U.S. Dollar Index, which measures the greenback’s value against a basket of six overseas denominations, rose 0.7%.

Oil futures dropped slid almost $8, trading under $100 a barrel in New York as fears about slowing demand due to global economic weakness gripped the commodity markets. The broad Dow Jones-AIG Commodity Index slid more than 4%.

Analysts said the flurry of developments around the world is confirming fears that the global financial contagion is likely to spread further before any recovery. “There’s an increasing realization that the cleanup and the mending of all that’s gone wrong is going to take an extended period to work through, and we’re going to see an extended recovery period,” said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.

Well, it looks like there will be no further voting in Congress today – at least, that’s the buzz. Too dangerous. Too much risk of another failure. Stakes far too high.

The immediate consequences are unknown, but it would appear this development will accelerate the financial meltdown currently taking place. Given current events, consumers might well expect higher borrowing costs, just as homeowners face stiffer mortgage costs and new home buyers encounter a cold shoulder from bankers. In our modern world, credit is the lifeblood of commerce, and the failure of this bailout is potentially monumental.

So, are there consequences for Canada? For our election? For the government?

The coming few days will tell, of course, but the fact remains we are vulnerable. As detailed in the post below, the current administration has not taken defining steps to safeguard Canadians.

The middle class is at risk. Will it notice in time?

Credit crunch hikes Cdn mortgage rates, here.

Market dives on bailout dithering

I hope to post some further thoughts on the precarious position we are all now in, within a few hours. Needless to say, things are not getting better. I mean, last night the biggest bank failure in US history occured, and it was not even the lead news item this morning. Yikes!

The $700-billion bailout of Wall Street looks decidely iffy. Even if it takes place amid the posturing positions and shifting platform sands of Obama and McCain, it will likely be a fatally flawed rescue, bound to come unseamed in the coming months. Sorry to say, but these are just the early chapters of a story with much more to come. And so long as instability reigns, residential real estate will be the victim.

The Canadian market is doing exactly what I forecast. This will continue. Declines in prices of 10% or 12% in Alberta will become 20% and 25%. Vancouver ultimately will be even harder hit, and Toronto values will drift lower at the end of 2009 by about 15%. Some neighbourhoods, far more.

The deniers will keep it up. You could hear more of that this week on CBC and CTV, as the bank economists and hopeful, battered, savaged realtors were trotted out to bolster confused consumers. Hopefully, Canadians will trust their sense that all is not well, and avoid being talked into a purchase at the very time when equity is most at risk.

Yesterday a local sent me the real estate board report for one market I am campaigning in – Milton, the fastest growing town in Canada, where there are acres and acres of subdividions full of fresh-faced young couples who bought in many cases with 1.5% down. They lusted after granite counter tops and the perceived financial maturity and stability of a new home, and were lulled into this by builders, agents, banks and families who all believed (or profited from) the cult of the house.

The average price in Milton last month was 9.4% below year-ago levels – and this is in the one area of the GTA (an area of about 4 million people) with the most frenetic real estate activity. in practical terms, this translates into an average price of $330,000, down from $365,000. Do you have any idea what this means to a young family with no equity, and a big mortgage?

In this you can see the seeds of a Canadian meltdown. If you can’t, call the CBC.

BTW, the article below is in the Globe today:

New economic climate puts chill on Toronto real estate prices

The country’s largest housing market, Toronto, is slowing as sales drop and a decade-long run-up in prices stalls.

Recent figures show prices have flatlined across the Toronto region, and in both middle and high ends of the market.

The soft market and forecasts of more of the same ahead do not signal a U.S.-style tumble, experts said yesterday, but rather point to a dawning realization that sellers can no longer count on unrelenting price hikes to boost their worth.

Fuelling the new reality was a move yesterday by two banks – TD Canada Trust and Bank of Montreal – to raise mortgage rates in Canada as fears of inflation resonate through the bond market and U.S. lawmakers edged closer to a deal on a $700-billion (U.S.) bailout plan for Wall Street banks.

“Revise your expectations going forward. It’s not a valid assumption,” TD Bank chief economist Don Drummond said.

“Unless you are skillful on the timing or you are lucky you don’t tend to make a killing on real estate.”

Home price declines have already hit Calgary, Edmonton and Vancouver, and now cracks in the market appear to be spreading into Toronto. Existing home sales activity dropped by 22 per cent in August from the same month a year earlier, while prices edged up by just 0.8 per cent, according to the Canadian Real Estate Association.

Though cooling off, the Toronto house market has not hit the wall, according to Mr. Drummond and others.

“We have gently nudged the wall,” he said. “I expect barely positive [price rises] over the next little while.” But he went on to ask and answer his own question: “Are they going to come down Miami style? Absolutely not.”

According to the Toronto Real Estate Board, average house prices dipped 1 per cent in August over a year earlier but climbed in the first half of September. For the first half of this month, the board recorded 998 sales, a 23-per-cent drop from the same period a year ago.

As of mid-month, the average house price in Toronto was $386,524, up marginally from the same period a year ago and 12 per cent higher than 2006.

There is still a lot of money in the market, contended Michael Polzler, executive vice-president and regional director, RE/MAX Ontario-Atlantic Canada, with people with realistic expectations still able to sell their homes.

But he cautioned that homes are likely to stay on the market longer than during the height of the boom, and sellers shouldn’t expect bidding wars.

This is good news for buyers who until recently had no crack at markets such as central Toronto, he said.

Now these shoppers

may have a chance to get

into desirable markets and make more careful purchases than they did in the past, he said.

In the luxury home market, Toronto was among five of 15 cities that experienced year-over-year sales declines, according to a report yesterday by RE/MAX.

Sales of homes listed at $1.5-million or more dropped from 505 in the first seven months of 2007, to 487 in the same period this year.

The timing of the slowdown comes as Toronto homeowners brace for word next month from the Municipal Property Tax Assessment Corporation on changes in home property values since 2005.

Earlier this month, the agency said that as of January, 2008, property values have risen an average of 20 per cent across the province.

PAST THE PEAK?

SOURCE: REAL ESTATE BOARD

‘Inevitable’ housing mess inches closer, MP-author claims

Wednesday Sept 24 – After warning in a best-selling book published six months ago that Canada’s real estate market was ripe for a tumble, author and MP Garth Turner says a US-style housing mess could now be just around the corner.

Canadians should prepare for a drop in average home prices of between 15% and 40%, depending on the market, he says. Turner also points out prices in some markets, such as Calgary and Edmonton, have already plunged by more than $40,000, while the number of homeowners trying to unload their properties has soared.

“Today’s report by Merrill Lynch economists David Wolf and Carolyn Kwan is just further tangible evidence,” Turner says. “Canadians have taken on a personal debt load which is simply unsustainable, and has been encouraged by government policies in this country no better than those which allowed the subprime mess and the credit crisis in the States to develop.”

Turner outlines in his book, “Greater Fool, The Troubled Future of Real Estate” and again today that Ottawa’s decision to allow a relaxing of mortgage rules, resulting in 40-year mortgages and zero down payments had “a pivotal role” in turning a strong housing market into a bubble, now bursting. The federal government moved hastily several weeks ago to outlaw the longer amortizations, and zero-down loans, which allow first-time buyers with little or no cash to purchase homes. They will no longer be available after October 15^th.

“While these practices should be ended, of course, the abrupt cut-off is just serving to accelerate housing’s decline,” Turner says. “Jim Flaherty could not have picked a worse time – as the United States teeters on the edge of the financial abyss – to have taken such an action. I warned of harsh consequences when it occurred, and they are now here.”

The average home price in Canada has dropped for the past three months, and is now 5% below year-ago levels. Turner says this decline will at least triple over the next year. At the same time, the number of resale homes on the market, as reported by the Canadian Real Estate Association, has hit an all-time high. Average prices are now dropping in virtually every major Canadian city, reflecting a US trend currently three years old.

American home prices are lower by an average of 18%, and the drop in some markets, such as California and Florida, has been in the 40% range.

“The American middle class has been walloped by the housing collapse,” Turner say , “and those who claim Canada is no different – including Stephen Harper – are simply misleading people. Canadians are carrying more personal and household debt than ever in history – even more overextended than families in the US or Britain. And our average home price has increased to the point where the average family cannot afford it.

“It is simply irresponsible for Mr. Harper to be sugarcoating a serious situation simply because there’s an election to win,” Turner says. “The last thing young couples thinking about a house purchase should hear is that everything is normal, and this is a great time to walk into debt that might end up being unrepayable.”

Turner also lays blame at the feet of the federal government for increasing middle class financial stress by refusing to consider income tax cuts, knowing what was brewing south of the border.

“The American housing disaster started in September of 2005, and was well-known to everyone who cared to look by the Spring of 2006 when Mr. Harper was forming a government. That mess has worsened for three years, and has now infected the entire banking system. For our government not to have prepared better, lowered income taxes and assured the integrity of the mortgage system was simply dangerous.

“Every Canadian family owning a home should be paying attention,” Turner says. “In this election, they should be demanding an action plan from everyone knocking on their door.”

Garth Turner is a best-selling financial author, Member of Parliament for Halton, and Liberal candidate.

For more information:
(905) 399-5114

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