Friday, January 18, 2008

A US recession may not be that bad for Vancouver's real estate market

People have been asking me how the credit situation in the US and a potential recession down there and this article is in line with my arguments that a US downturn will not affect Vancouver's real estate market hugely.

My reasoning is this. BC and Alberta's economies are being supercharged by demand for natural resources that China and India are consuming voraciously. The US consumes our resources too, but prices are at all time highs for these commodities because of the Asian demand.

If demand in the US declines prices may come off the all time highs, but prices will still be good because of Asian demand that didn't exist 15-20 years ago will still be there and growing.

Read the article below and let me know your thoughts.

Can commodities shake off a U.S. recession?

Globe and Mail Update

Commodity prices have brushed aside escalating fears of a U.S. recession and stayed near record highs, leading one Canadian economist to suggest that the U.S. economy's importance in the overall global equation — and especially for resource markets — is waning.

“Whether the U.S. is heading for a recession or just a mid-cycle slowdown remains to be seen,” CIBC World Markets chief economist Jeff Rubin wrote in a report released Friday. “But the more important question for crude, base metals and other resource markets, is whether it really matters any more.”

A growing sense of gloom about the prospects for the U.S. economy has hammered stock markets this week. Canada's benchmark equity index has been hit particularly hard on the notion that a slowdown in the U.S. will soon spread to other countries and curb demand for Canadian natural resources.

However, Mr. Rubin pointed out Friday that commodity prices have stubbornly held their ground in the face of the recent stock selloff: crude oil futures are trading at $90 (U.S.) a barrel while copper is worth $3.20.

The biggest factor behind the stubborn strength of commodity prices is the dwindling importance of the U.S. economy to the global economy, Mr. Rubin said. In the late 1990s, the American economic growth accounted for nearly 30 per cent of global growth while today it accounts for only 10 per cent.

“And that loss is much greater when it comes to impacting resource markets,” he said.

Mr. Rubin made headlines last week when he forecast that Canadians will soon be paying $1.50 (Canadian) a litre for gasoline. His assertion that crude prices, which surged to a record high above $100 (U.S.) a barrel at the start of 2008, will likely hit $150 by 2012 is based on the belief that burgeoning global demand for will outpace supply.

On Friday, he pointed out that while the U.S. is still by far the largest global user of oil, its contribution to global demand growth in the last two years has been flat. Furthermore, the economist maintains that when pump prices in the U.S. hit $4.50 a gallon by 2012, American crude consumption will fall even further.

“More or less the same story can be told for base metals,” Mr. Rubin said. “While bearish reports on the U.S. economy can still unnerve base metal markets, there is little in the pattern of recent demand growth to substantiate such fears.”

American consumption of zinc and copper has dropped while aluminum and nickel has remained flat in the last five years. During that same time period, demand from China has jumped 20 per cent annually, making it easy to see why base metal prices have stayed high even as the U.S. economy ebbs.

The increasingly dire nature of the recently economic data in the U.S. has heated up talk of a recession, but economists and strategists are divided on whether the U.S. economy is already mired in a recession or just close to one.

U.S. President George W. Bush and central bank chief Ben Bernanke have endorsed a stimulus package that they hope will prevent the spreading housing mess — and the credit woes stemming from the meltdown of the subprime mortgage market — from triggering an official recession.

Economists surveyed last week by The Wall Street Journal pegged the odds of a recession this year at 42 per cent up from 38 per cent in December and 23 per cent just six months ago. Goldman Sachs pointed to last month's dismal jobs report as evidence that the U.S. economy is likely headed for a recession.

National Bank Financial has the odds of a U.S. recession at 70 per cent, up from 50 per cent in August, and a Canadian recession at 30 per cent, up from 20 per cent a few weeks ago.

"As far as the S&P/TSX is concerned, the question is whether the decoupling of Asian emerging economies with the U.S. will hold, leaving the commodity rally alive," said Clément Gignac, National Bank's chief economist and strategist.

Mr. Rubin believes there is an “exaggerated element” to fears of a U.S. weakness. Default rates on subprime mortgages will never get anywhere close to the 50 per cent rate that the credit default swap market has already discounted, he said, while U.S. factory orders — normally hardest hit in a recession — appear to be rising.

The U.S. economy is not in a recession right now, the CIBC report said, although that does not mean it will not slide into one in the coming months.

Economists at CIBC are calling for first-quarter 2008 U.S. real GDP growth to remain barely positive at 0.2 per cent before rebounding to 2 per cent in the second quarter and 2.2 per cent in the third. Their Canadian growth outlook, meanwhile, predicts GDP expansion of 1.7 per cent in the first quarter, and 2.7 per cent in both the second and third quarters.

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