Entries from December 2009 ↓

2010

20101

Did you enjoy the housing boom of 2009?

Hope so. She’s done.

Oh, there may be hyperbole & hormones for a few months yet, but come the federal budget of 2010 – that would be in March, about 90 days from now – it looks like the hammer is coming down. This is because we’ve just received the clearest sign yet that the government has awoken with horror to the consequences of its actions. Worse, these guys are now understanding they could well be blamed for making a home into an unaffordable commodity.

So, what’s up?

Well, remember how the 2008 budget at a stroke ended the 0/40 house rush by mandating minimum insurable downpayments of at least 5% and ams no longer than 35 years? Sure ya do. It was a dramatic reversal of policies put in place just two years earlier which had given federal blessing to people with no money who wanted to buy houses. (And in so doing put a lie to the myth we’re any different than the subprime-toting Yanks.)

Looks like it will happen again. Said the finance minister on Friday: “If we have to, we’ll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments.”

JF Jim Flaherty also – for the first time, as far as I can tell – used the ‘B’ word. Upward pressure on housing is to be expected because of cheap mortgage rates, he said, “as long as it doesn’t become a bubble. We’re watching that.”

I’ll bet. It doesn’t exactly square with Conservative-supporting middle class voters being priced out of the real estate market by a flipped-out central bank keeping rates at one quarter of one per cent. Or by young couples with diddly saved who are able to fight bidding wars because they have loans at 2%, thereby jacking valuations to historic levels.

In fact, it’s getting tough to see who benefits in the long run as housing becomes overvalued and buyers get overextended, as household debt races to a new high and mortgage indebtedness explodes. Especially now when a chastened BoC has made it clear interest rates have nowhere to go but up – spelling out disaster when the 5/35 crowd comes up for renewal.

So, Ottawa now gets it. Too late, of course. Horse. Barn. Not to mention the average $931,000 SFH in YVR.

So, this is why, if Carney’s rate-thumping doomer talk doesn’t kill the property drive, Flaherty’s new rules will.

Just imagine if the minimum was 10% down and a 25-year am, combined with Carney’s expected 2010 rate increase of about 1.5%.  That would mean the average home in Toronto, at $450,000, would require a down of $45,000, insurance of $12,000 and LTT of $11,000 for $78,000 cash at closing plus an income of $75,000 to carry it at the cheapest VRM rate.

But then, it wouldn’t be $450,000 anymore, would it?

Economic forecasting

forecast

Many loose words fly around this site when it comes to inflation, deflation, hyper-inflation, currency collapse and the immediate years ahead. What can we expect? What does it matter?

In the last few weeks stock markets have been twitchy and losing ground. So has oil. And gold. Plus the loonie. There’s only one reason for this: the American dollar. As the recovery proves elusive, a few national economies teeter on the edge of insolvency and governments ponder a slew of bad choices, investors have been rushing back into greenbacks.

There are several reasons. One is that the US dollar is still the global reserve currency and perceived to be the safest of safe havens offering total liquidity and shelter from debt storms. There’s no reason this is going to change much in 2010.

Certainly there’ll be no double-digit inflation in the States, no matter how damn much money they print. It is not in the national interests of Americans to devalue the currency in terms of families’ purchasing power while unemployment remains so high, or doing going into the 2010 mid-term elections. That will not happen.

The second reason for the US currency strengthening will come with Obama’s commission on deficit reduction – a movement in Congress that now seems unstoppable. Millions of Americans are appalled at the debt the country is accumulating, and there is a growing political appetite to (a) raise taxes and (b) slash Washington’s spending. In some form, both of these will happen, especially if Republicans win a few key seats next year. This will be very bullish for the greenback, even though it means more years of slow growth.

Thirdly, the longer the American dollar remains weak, the more its trading partners will cry foul at newly-cheap US exports. This has the effect of shipping American unemployment to other jurisdictions, which is the last thing places like Britain (a key Iran-Iraq ally) need.  So while Washington has hundreds of billions in bonds to sell each year – the majority to offshore investors – the greater the incentive to stabilize the dollar. The easiest way to do that is with monetary policy – a quick little rate hike.

And let’s remember that inflation is the result of economic conditions, while hyper-inflation is a purely political decision. It does not just happen. Leaders have to consciously decide to devalue a currency, and then do it in a massive and concerted fashion, generally with the overnight recall or effective redenomination of existing currency. This, I can assure you, will never take place in the US, as it would be the death knell of the entire North American economy. Washington is not about to impoverish its citizens.

Deflation actually remains a more potent potential threat, and the key reason $40 billion has now been pushed directly in the hands of people buying cars (cash for clunkers) and houses (the $8,000 and $6,500 tax credits). Consumer spending has simply not rekindled, household savings rates are higher in the States (and lower here), and prices keep on falling. This – not any hyper-inflation mythology – is what keeps Ben Bernanke up at night. (By the way he recently cashed in his own VRM for a locked-in mortgage. Ask me why.)

Make no mistake, we are not out of the economic woods yet. Investors today would be wise to (along with a good equity strategy):

  • dump real estate at the top,
  • buy commodities on the dips,
  • chase a tax-advantaged 6% dividend yield,
  • be wary of index ETFs in a range-bound market and
  • short bonds.

But wait for Armageddon, currency collapse, wheelbarrow cash and Mad Max?

In your dreams, puss.