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Canadian home prices continue to rise Sunny Freeman — The Canadian Press

2010-08-26 | 06:10:42

Canadian home prices continue to rise  Sunny Freeman  — The Canadian Press  

Canadian home prices are still on the rise even as sales fall as demand peters out, one factor that is making homes less and less affordable, according to a study by the Conference Board of Canada.

Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as fewer buyers compete and more houses come onto the market. That hasn't stopped houses from becoming more expensive, a trend that is likely to continue, said conference board associate director Michael Burt.

“Most of the costs associated with home ownership, such as mortgage costs and insurance, are outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.

“As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years.”

Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—National Bank composite house price index, released Wednesday. Month over month, June prices were up 1.5 per cent — the largest monthly increase since last August and the 14th straight monthly increase.

Price increases in June were driven by the bustling housing markets of Vancouver and Toronto, where many buyers entered the market in advance of the new harmonized sales tax that took effect July 1 in Ontario and British Columbia.

Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices were essentially flat.

As more resale houses come onto the market and fewer buyers compete for homes, the housing market is at a crossroads between a balanced market and one that favours buyers.

Many economists predict the sector could move further toward a buyers market, which could be accompanied by a deceleration of price increases, if not outright price drops as seen in the United States.

Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price of many home purchases

His report on the index — a compilation of average home price changes in six metropolitan areas — suggests that it may be too early to conclude that vigorous price rises in April, May and June represent a trend.

“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.

Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7 per cent compared to June 2009, according to the Canadian Real Estate Association.

However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.

Sales activity peaked in December 2009 and hovered near record levels during the first quarter of this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest rate hikes and the HST.

Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the gap is expected to shrink as the year progresses because sales ramped up heavily during the latter part of 2009.

The strong pace of spending at the beginning of the year indicates the Canadian industry has fully recovered from the recession, and although new home construction activity is expected to slow, housing starts will remain at a healthy level, the Conference Board said in its report.

Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home building is expected to slow during the second half of the year.

“The slowdown represents a shift to a more sustainable building pace rather than the beginning of a large correction in demand,” said the Conference Board.

Many economists predict an accompanying deceleration of price increases, with some saying prices could begin to fall modestly by the end of the year.

While performance in the Canadian housing market is weakening, it is faring much better than the U.S. market, where the past three months have been the worst on record for new home sales.

Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back nearly half a century, the latest sign that the economic recovery is fading.

The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600.

With files from the Associated Press  http://www.theglobeandmail.com/report-on-business/canadian-home-prices-continue-to-rise/article1685242/  

an home prices are still on the rise even as sales fall as demand peters out, one factor that is making homes less and less affordable, according to a study by the Conference Board of Canada.

Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as fewer buyers compete and more houses come onto the market. That hasn't stopped houses from becoming more expensive, a trend that is likely to continue, said conference board associate director Michael Burt.

“Most of the costs associated with home ownership, such as mortgage costs and insurance, are outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.

“As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years.”

Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—National Bank composite house price index, released Wednesday. Month over month, June prices were up 1.5 per cent — the largest monthly increase since last August and the 14th straight monthly increase.

Price increases in June were driven by the bustling housing markets of Vancouver and Toronto, where many buyers entered the market in advance of the new harmonized sales tax that took effect July 1 in Ontario and British Columbia.

Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices were essentially flat.

As more resale houses come onto the market and fewer buyers compete for homes, the housing market is at a crossroads between a balanced market and one that favours buyers.

Many economists predict the sector could move further toward a buyers market, which could be accompanied by a deceleration of price increases, if not outright price drops as seen in the United States.

Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price of many home purchases

His report on the index — a compilation of average home price changes in six metropolitan areas — suggests that it may be too early to conclude that vigorous price rises in April, May and June represent a trend.

“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.

Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7 per cent compared to June 2009, according to the Canadian Real Estate Association.

However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.

Sales activity peaked in December 2009 and hovered near record levels during the first quarter of this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest rate hikes and the HST.

Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the gap is expected to shrink as the year progresses because sales ramped up heavily during the latter part of 2009.

The strong pace of spending at the beginning of the year indicates the Canadian industry has fully recovered from the recession, and although new home construction activity is expected to slow, housing starts will remain at a healthy level, the Conference Board said in its report.

Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home building is expected to slow during the second half of the year.

“The slowdown represents a shift to a more sustainable building pace rather than the beginning of a large correction in demand,” said the Conference Board.

Many economists predict an accompanying deceleration of price increases, with some saying prices could begin to fall modestly by the end of the year.

While performance in the Canadian housing market is weakening, it is faring much better than the U.S. market, where the past three months have been the worst on record for new home sales.

Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back nearly half a century, the latest sign that the economic recovery is fading.

The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600.

With files from the Associated Press  http://www.theglobeandmail.com/report-on-business/canadian-home-prices-continue-to-rise/article1685242/  

Top 6 most indebted countries (and why)

2010-08-26 | 06:04:31

Top 6 most indebted countries (and why)

by Michael Sanibel, Investopedia.com

The recent financial  crisis and recession have been a worldwide occurrence. The events in the United States since 2008 have garnered most of the headlines because the U. S. has the world's largest economy and national debt, but the reality is that many countries in Europe are in worse financial shape and continue to deteriorate.

There are various ways to rank indebtedness, such as debt per capita and deficit or debt as a function of gross domestic product (GDP). This ranking is based on cumulative debt as a percentage of GDP and is limited to an analysis of the 25 largest economies. It is further limited to "external" debt, which is the portion of the national debt that is owed only to foreign creditors. The source for the debt and GDP amounts is the Central Intelligence Agency World Factbook most recent numbers from mid to late 2009.

   1. Ireland - Debt/GDP: 997%
      The days of Ireland enjoying one of the fastest growing economies in Europe are over, at least for now. The story is all too familiar, as easy credit fueled a housing bubble that burst and damaged consumer confidence.

      After recording budget surpluses in the prior two years, the economy reversed course in 2009 and contracted 7%. This eroded tax revenues and sent the annual deficit to a record 14.3% of GDP. The European Union set a target for Ireland to reduce that figure to 3% by 2014, but the International Monetary Fund has indicated that the deadline will be missed. Moody's has subsequently lowered its bond rating.

   2. Netherlands - Debt/GDP: 467%
      The national debt in the Netherlands has reached record levels as a result of the world financial crisis and recession. Much of the added burden was caused by significant government support for the country's banking sector. The increase in debt per capita is second only to that experienced in Ireland.

      The Netherlands joined the eurozone with a hard guilder a decade ago, but its current debt would likely disqualify it for membership.

   3. United Kingdom - Debt/GDP: 409%
      Investment bank Morgan Stanley fears that Great Britain could face a severe debt crisis in the near future if it continues down its current path. According to the bank's report, this is a case of not putting aside sufficient reserves when the economy was sound. During the peak of the boom, it still ran a budget deficit of 3% of GDP when other European countries were running surpluses exceeding 2%.

      Like many other countries, Britain bought time during the financial crisis by implementing massive fiscal stimulus and forcing the public to fund losses in the private sector. Without the restoration of fiscal credibility, there is a significant danger of a government bond sell-off, pound weakness and a flight of capital.

   4. Switzerland - Debt/GDP: 273%
      Generally regarded as having one of the world's most stable economies, Switzerland has taken its budget crisis seriously. When the national debt began to escalate in the last decade, the Swiss voted to approve a constitutional amendment forcing the government to balance expenses and revenue during each economic cycle. While annual deficits may still occur, this has instilled discipline in the process and lowered the country's borrowing costs as investors rushed to safety.

      This so-called "debt brake" was implemented in response to increasing debt stemming from a slowdown in economic growth. Deficits climbed as spending rose for unemployment benefits and tax revenues declined. While government expenditures were cut across the board, rising revenues have not been sufficient to pay down the incurred debt.

   5. Portugal - Debt/GDP: 228%
      With last year's deficit coming in at 9.4% of GDP, the Portuguese government has instituted a growth and austerity program with the objective of reducing that number to 2.8% by 2013. These measures have sparked strikes in the public sector including postal and transportation services. Those events have been further propelled by unemployment above 10%, the worst in 40 years.

      The root problem has been low productivity and virtually no economic growth in the past few years. Portugal ranks last in GDP growth among countries that adopted the euro as a common currency. Demand for goods and services has stalled, along with innovation and business momentum. In addition, Portugal's exports have been undercut by cheap labor in countries such as China. (For related reading, see The Economics Of Labor Mobility.)

   6. Austria - Debt/GDP: 214%
      The recession and government assistance to banks have contributed to the budget crisis in Austria. The finance minister has rejected the notion of higher taxes in favor of administrative reforms to cut spending. He has predicted that the annual deficit would grow from 3.5% to 4.7% of GDP between 2010 and 2012 before starting to decline. That peak would be the third-highest since 1976 when such data were first recorded.

      Rising unemployment has resulted in increased expenditures for unemployment compensation and other government benefits. In addition to the reduced payrolls, tax reforms have driven down overall tax revenues.

The Bottom Line
While the U.S. and Canada have large economies, their respective debt-to-GDP ratios are 93% and 62%. The U.S. gets most of the attention because of the size of the numbers that comprise the ratio - $13.5 trillion debt (June 2009) and $14.4 trillion GDP (2009 estimate).

By comparison, China and India have ratios of 7% and 20% respectively. Their economic growth rates have also exceeded the western nations over the past few years, thereby keeping their debt ratios relatively low. If the western nations don't implement policies to reduce their debts, they run the risk of jeopardizing future economic growth and prosperity. http://ca.finance.yahoo.com/personal-finance/article/yfinance/1785/top-6-most-indebted-countries-and-why

Five expenses that will consume 50 per cent of your lifetime earnings

2010-08-20 | 09:59:06

Five expenses that will consume 50 per cent of your lifetime earnings

by Manisha Thakor, Forbes.com
In these recessionary times, financial tips are flowing fast and furious about how to save money and stick to a budget. Facing a sea of information, many people are asking, “Where do I start?”  For most of us, five areas of spending will consume over 50% of the money we earn during our lifetime, so that’s the best place to begin.

The five areas are: Home, car, children, education and retirement.  Here’s what you need to know about each:

    * Don’t bite off more HOME than you can chew. How much house can you comfortably afford? For most people the answer is a house with a purchase price of no more than 3x their annual household income.  Rationale:  the cost of a home includes much more than the monthly mortgage payment. It’s also property tax, insurance, upkeep, etc.  Typically these costs run 2%-3% of the price of your home each year.  Assuming a 20% down payment, a 30-year fixed rate mortgage, and interest rates in the 5%-6% rate, the 3x your income rule of thumb will translate into total housing costs of roughly 30% of your gross income.

* Don’t let your CAR drive you to the poor house. The same logic applies to your car. Most people can comfortably afford a car that is one-third of their annual income.  If you make $60,000 you can comfortably afford a car that costs $20,000.  If that seems low – now you know why so many people are in financial trouble.  They are driving it.  A car has many other costs than simply the monthly payment.  There’s insurance, gas, parking, maintenance, etc.  If you follow this rule of thumb,  your total transportation costs should be 10% or less of your gross income.

    * Don’t let your KIDS kick you in the wallet. Kids are expensive.  From a purely clinical standpoint the Dept. of Agriculture estimates it will cost $220,000 to raise a child born in 2008 from diapers to age 18. And that figure is before you add in the cost of college or university!  Deciding to be a parent is a major financial obligation.  Don’t make it worse by over-indulging your love bundles.

    * Don’t forget to ask “How high is too high for higher EDUCATION?” It used to be good debt was defined as mortgage and student loan debt… and bad debt was everything else.  Not any more.  We’ve now learned that too much of a good thing can indeed be bad.  Rough rule of thumb, don’t take on more in total education debt than you think you are going to earn on average annually during your first 10 years after graduating (from college/university or grad school).  In plain English, if you think you’ll make $50,000 a year, don’t take out more than $50,000 in loans. The logic behind this is that if it takes you more than 10 years of paying 10% of your income a year in student loan repayments, it’s going to be tough to meet your other financial obligations.

    * Don’t underestimate the need to feed your RETIREMENT nest egg. How much will you need to retire? A simple rule of thumb is to multiply your current income by 25.  So if you make $50,000 a year and want to maintain that standard of living in retirement, you’ll need a nest egg of at least $1,250,000.  Understanding early on in your working life what “your number” is… will help you see just how important it is to plan for this major savings goal. http://ca.finance.yahoo.com/banking-budgeting/article/forbes/83/five-expenses-that-will-consume-50-per-cent-of-your-lifetime-earnings

Why banks aren't paying higher interest rates

2010-08-20 | 09:54:57

by Tom Fennell,  Canada Finance
Wednesday, July 28, 2010

So far in 2010, Canadians have opened 20 per cent more chequing and savings accounts than last year at this time.

That amounts to about $100 billion in new deposits and Canada’s major banks have been fighting for a share of it with incentives, including cash rewards for customers opening new accounts.

While consumers can get cash and travel points to open a new account, there is one conspicuous weapon missing in the banks’ marketing arsenal when it comes to attracting new customers. 

And that is the lure of higher interest rates, something you won’t find the banks offering on those new savings accounts and products – or old ones for that matter.

On July 20 when the Bank of Canada raised its overnight rate by 0.25 per cent  to 0.75 per cent,  the increase was immediately passed on to consumers with lines of credit, mortgages and other products that were priced directly off of the prime rate.

Which raises an obvious question: why doesn’t a jump in the bank rate, which can signal a sudden increase in the rate of interest charged on a line of credit, trigger a corresponding interest-rate increase on products such as savings accounts and GICs?

It’s certainly an answer many investors with money sitting in the bank would like to know.

After all, with the banks paying between 1 per cent and 2 per cent on many savings products it would take years to generate any kind of return. In fact, if your bank is paying you 1 per cent annually on your savings account it would take 72 years to double your money – at 2 per cent it would take 36 years to double up.

Even worse, with inflation factored in, consumers are actually losing money on bank deposits.

It isn’t likely to get any better, especially with consumers clamouring for the security of savings accounts and GICs. Indeed, according to some economists, in the current environment the banks are under even less pressure today to increase interest rates on savings accounts and GICs than they have been historically.

Mike McCracken, an economist and head of Ottawa-based Informetrica,  says as the Bank of Canada raises rates, it allows the major banks to turn around and say, “look at us we’re wonderful guys” withdrawing stimulus just like Bank of Canada governor Mark Carney wanted.

They then turn around and increase interest rates on a wide range of lending products – but not on savings or GICs. And notes McCracken, it’s not unusual for the banks to crank up interest rates on many of these products by 0.50 per cent after a 0.25 per cent Bank of Canada increase.

The fact there is a lot of surplus money in the banking system is also helping the banks keep rates low on savings products. “Right now the demand for loans is very low,” says Doug Peters, former chief economist at TD Bank.

“Businesses are not expanding or investing, so banks don’t need to raise interest rates on those deposits.”

There are forces at work in the wider market that are also conspiring to keep interest rates on savings and GICs low – even if Carney continues to raise rates.
That’s because investors who were pummeled in the financial crisis don’t want to be beat up again. And when the European debt crisis erupted this spring, they dumped equities  and fled to the safety of bank deposits and T-bills.

With so many people seeking shelter in bank deposits and other conservative investments, at one point this spring the government was even able to reduce the yield it paid on products like T-bills, a staple holding in money-market mutual funds.

The fact Europe and the U.S. have so far refused to raise interest rates, doesn’t help Canadian fixed income investors. Their reluctance to raise rates, gives the Bank of Canada the option to move slowly. And by extension, it takes the pressure off the major banks to raise the interest it pays to consumers.

On top of that, there is little sign of inflation, a factor that could force Carney to raise rates at a quicker pace if it moves higher. So savers may have to wait a long time before they see a return to 5 per cent interest rates.

“Eventually interest rates on savings accounts will go up,” says McCracken, “but it won’t be anytime soon.”

So, on the one side of the bank ledger they can pass along interest rates increases with impunity, while keeping the interest rates that they have to pay on savings and GICs at historic lows. And as the spread, between what they have to pay out and what they take in widens after each successive interest rate increase, the more money the banks will make.

“It speaks to the power of the Canadian banks,” says Arthur Donner, a Toronto-based economic consultant. “They won’t raise rates until they absolutely have to.”

Still, the Bank of Canada is uniquely positioned to use “moral suasion” to convince the big banks to raise rates on savings products. But it may not be in the best interest of the Bank of Canada to do so at this time.

Donner’s reasoning: with the European debt crisis and the threat of a further economic slowdown still on the horizon, Carney may not be opposed to a wider spread between what the banks pays out in interest and what they bring in. This would allow the banks to build up their capital reserves just in case the economy stalls again.

Still, Donner has little doubt that at some time in the future if the Bank of Canada keeps raising rates, the major banks will be forced to pay consumer more for their money. “In the end,” says Donner, “if Carney keeps raising rates it will balance out.” Consumers can hardly wait.

CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad

2010-08-20 | 09:44:39

CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad

TORONTO, Aug. 18 /CNW/ - Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.

"North America's story is again darkening," says CIBC's Chief economist in the latest Global Positioning Strategy report. "We were looking for a material second-half slowdown for the U.S. but as it turns out, it's already happened."

Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.

And still ahead is a "further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.

"Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest."

While Canada is in much better economic shape - it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job - it "cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold," Mr. Shenfeld contends.

For starters, an interest rate differential of 300-400 basis points would take the loonie "substantially stronger" creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.

Furthermore, the "external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline."

Mr. Shenfeld doubts that the Bank of Canada "has been shocked enough to forestall a rate hike in September" but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC's outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are "lessons learned, we hope," says Mr. Shenfeld.

"Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening."

As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.

A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf

How to Minimize Your Risk of Debit and Credit Card Fraud

2010-07-02 | 09:52:06