Thursday, June 19, 2008

More Evidence Rates to Stabilise and then Rise

Hi All,

This is an interesting article on the Bank of Canada Governor's defense of his decision to not cut rates over the last few weeks. Like I mentioned in my earlier post on high fuel costs, higher fuel prices are beginning to pinch and the Bank of Canada sees inflation as a threat and that threat is dealt with by raising interest rates. The question is how much and when!

I'd love to hear your thoughts!

Carney defends decision on rates

Globe and Mail Update

CALGARY — Bank of Canada Governor Mark Carney says he needs to maintain a “relentless focus on inflation” during this period of soaring commodity prices to avoid a repeat of the painfully high inflation and unemployment that marred Canada's economy in the early 1980s.

In his first speech since the central bank abruptly switched direction last week and put a halt to the steep interest rate cuts of the past few months, Mr. Carney explained in detail why he could no longer justify adding stimulus to Canada's stagnant economy.

“In the face of the largest commodity price shock in our lifetimes, we cannot be complacent,” he said. “While commodity price shocks raise complex issues, a relentless focus on inflation clarifies policy decisions, makes communications easier and maximizes the likelihood that expectations will remain well anchored.”

Canada's economic activity contracted during the first quarter of 2008, and inflation has remained low and steady, despite soaring energy prices. In May, total inflation increased 2.2 per cent from a year earlier, but core inflation – which excludes the most volatile prices such as energy and some types of food, and is the focus of the bank's monetary policy – was a benign 1.5 per cent, Statistics Canada said Thursday.

The combination of a slowing economy and low inflation had led many economists to expect the central bank to continue cutting rates. The central bank has already lowered its key interest rate from 4.5 per cent to 3 per cent since December.

But Mr. Carney, speaking at a conference titled “Commodities, the Economy and Money” sponsored by the Haskayne School of Business at the University of Calgary, the Bank of Canada and The Globe and Mail, avoided the topic of low growth on Thursday. Instead, he reminded his audience that inflation-fighting is the single priority of the central bank.

During the 1970s, he said, central bankers made a major mistake in cutting interest rates too far to help consumers deal with rising oil prices. At the same time, governments boosted spending as if the extra revenues they were pulling in from high profits in the oil patch would last forever.

“The fallout from these errors in monetary and fiscal policy was severe,” Mr. Carney said. “The global recession of 1981-82 was, in large measure, the end result.”

Canadian inflation and unemployment soared to double digits by the early 1980s, and took years to unwind, he recalled.

Recently, the Canadian economy has been rocked by the U.S. slowdown and financial market turmoil, but the central bank now needs to focus on the effects of rising commodity prices on the Canadian economy, he said.

He pointed out that commodity prices have risen higher than expected – indeed, Mr. Carney had been predicting that they would fall. Since Canada is a major commodities producer, the higher prices will support domestic demand in Canada, as oil and gas revenues flood into the country.

Plus, global growth – and hence, global inflation – has been higher than expected, pushing up the cost of Canadian imports. At the same time, the anti-inflation shield provided in the past year by a rising Canadian dollar is eroding as the currency has stabilized.

And the effects of the credit crunch have improved significantly in Canada, Mr. Carney said.

“This evolution of the global economy and domestic demand was sufficient to alter the view” that Canada needed further rate cuts, the governor said, suggesting the central bank would keep rates on hold for now.

That means the commodities boom, which has been great for Canada, will continue to be beneficial, Mr. Carney argued.

“We are experiencing a commodity supercycle,” he said, during which commodity prices have risen further and stayed high longer than in previous booms.

“Above all, rising commodity prices have made Canada wealthier as a nation,” creating good jobs across Canada and boosting the country's income.

Many economists have argued that rising commodity prices have seriously harmed Central Canada's manufacturing base, and warn that Ontario is on the brink of a recession.

But Mr. Carney said the “stress and dislocation” caused by high commodity prices is unavoidable, and prompts economies to adapt to a more efficient allocation of resources.

The Governor hinted, however, that policy makers need to make sure they don't fritter away the proceeds of the boom, referring twice to a popular bumper sticker seen frequently in the oil patch 20 years ago that reads: “Dear Lord, give us another oil boom and we promise not to piss this one away.”

He predicted that energy prices would remain high, since demand in emerging markets is strong, and the supply response has been “disappointing.”

While commodity prices won't necessarily rise persistently, “this appears to be a durable relative price shift,” Mr. Carney said, adding that there is no clear-cut evidence that speculation is creating a commodities bubble.

But eventually, consumers will find cheaper alternatives, and production costs will come down through the adoption of new technologies.

“Demand and supply will adjust, particularly as prices are passed through.”

Rising Fuel Prices Focusses Bank of Canada on Inflation, Interest Rates to Hold or Rise

Hi All,

I filled up my car yesterday and was shocked to see premium fuel selling for $1.69!!!

That's huge! I usually don't worry about the fuel price as my predilection for high performance cars makes concerns futile, but I was shocked and the increase in fuel prices hit home.

The Bank of Canada pays attention to inflation and the increase in fuel prices has a huge knock on influence as everything we consume is moved by vehicles using fossil fuels. At some point the run up in fuel costs begin to bite and thats when the Bank of Canada is going to be forced to raise rates.

A rise in rates is not necessarily a good thing for Vancouver Real Estate in the short term, but high fuel prices are good for Vancouver Real Estate in the medium term.

This is the reason. High fuel prices focus peoples minds on the costs of less efficient forms of transportation (single occupant cars) and encourages them to use more efficient forms of transportation (walking, public transit, bikes, etc) OR even better encourages them to move into the City! So overall in the medium term (in the long term we are all dead) high fuel prices are good for Vancouver real estate and good for the environment.

Inflation rises to 2.2% in May

Globe and Mail Update

Soaring gasoline prices sent the Consumer Price Index in May to its sharpest monthly increase since January, 1991 – the month the goods and services tax was introduced in Canada.

Year over year, consumer prices rose 2.2 per cent in May, primarily because of higher gasoline prices, which were up 15 per cent from May, 2007, Statistics Canada said Thursday.

The increase exceeded expectations, “which gives a good idea why the Bank of Canada is suddenly becoming much more focused on headline inflation readings,” said Douglas Porter, deputy chief economist at the Bank of Montreal.

The core inflation rate, which strips out the most volatile items such as gasoline and is normally used by the Bank of Canada to monitor the inflation control target, rose 1.5 per cent between May, 2007, and May, 2008, identical to the 12-month increase posted in April.

“While core is still well below the bank's 2 per cent target, it's doubtful they will take much comfort from that fact, with rampaging energy prices clearly threatening broader inflationary expectations,” Mr. Porter said in a research note.

Many economists had been expecting a year-over-year increase of 1.9 per cent, up from 1.7 per cent in April, according to a Reuters poll.

Higher mortgage interest costs, higher house prices and higher food costs all contributed to the increase, Statscan reported.

Canadians paid 1.9 per cent more for store-bought food items, compared with the same month last year, up from the 0.9 per cent posted in April.

“Prices for bakery products increased 13.2 per cent, the fastest 12-month rise since October, 1981,” Statscan said.

The CPI, always a closely-watched economic measure, took on added significance Thursday in the wake of the Bank of Canada's decision last week to hold steady on interest rates because of concerns about inflation. The Bank of Canada said in a statement on June 10 that if current levels of energy prices persist, “total CPI inflation will rise above 3 per cent later this year.”

The central bank's stance has set off considerable debate among economists, who were expected to closely monitor a speech by Bank of Canada Governor Mark Carney on Thursday night in Calgary to gain some clearer insights into his thinking.

In a research note, Toronto-Dominion Bank economist Charmaine Buskas said energy prices clearly played a big role in pushing the overall inflation rate higher.

“Core prices, however, were in line with expectations, rising … 1.5 per cent year over year,” she wrote.

Mr. Porter said “there are signs that the persistent run-up in energy prices is beginning to spill into other goods, although gasoline is still the primary source of inflationary pressures…

“Given today's result, a 3 per cent [year over year] reading as early as June is not out of the question (as prices fell last June),” he wrote.

Wednesday, June 18, 2008

A video of 1199 Marinaside Crescent at the Corner of Davie Street by Mike Stewart Marinaside Realtor

Hi All,

Here is a video I shot today of the intersection of Davie Crescent and Marinaside Crescent when I was doing a showing at my new listing at 503-1199 Marinaside Crescent

Thursday, June 12, 2008

Bank of Canada says Canada's Fine in Global Credit Crunch

Hi All,

Here's more evidence that the sub-prime crisis will not have much effect on us here in Canada. You can thank Canada's regulated financial system system that didn't allow sub-prime mortgages and 100% financing for keeping us in good stead. Then again, is it really worth the years of sub-standard customer service from the big banks?

I'd love to hear your thoughts.

Consumers, banks to feel pinch

Globe and Mail Update

OTTAWA — The global credit crunch has not hampered credit growth in Canada, but banks and household finances will likely feel pinched in coming months, the central bank says in a new assessment.

Global credit markets are still under stress, and spreads won't recede much until well into next year, the Bank of Canada said in its twice-yearly Financial System Review, and both the banking system and consumers remain vulnerable.

“Although there has been some improvement in conditions over the past several weeks, strains in global credit markets have broadened since December,” the review said.

Canadian banks have generally remained solid throughout the past 10 months of turmoil, and are able to tap markets to finance their shortfalls. Plus, they have continued lending to Canadian borrowers, albeit with different types of credit instruments that generally cost borrowers more.

But bank balance sheets “may experience further pressure,” the review stated.

That's because banks in Canada are more exposed to U.S. assets than banks in any other country. And the United States continues to have significant problems, both in financial markets and in its economy.

So Canadian banks will likely see their profits squeezed further, the review warned. Revenues from investment banking will likely fall, since the lucrative securitization market is not functioning. Loan-loss provisions are on the rise. And the financial position of Canadian households and businesses outside the finance sector is deteriorating.

Indeed, Canadian consumers are increasing their household debt levels, and finding that debt more expensive to service, the review showed.

Debt as a proportion of income has climbed steadily for the past 20 years, and now, debt is 131 per cent of income, the review points out.

At the same time, higher mortgage rates have pushed up the cost of carrying a growing debt load. The debt-service ratio was 7.7 per cent at the end of 2007, compared with 7.3 per cent in the middle of last year, just before the credit crisis erupted.

And the number of vulnerable households, with very high debt-service ratios, has climbed recently.

As the housing market comes off its recent highs, Canadian households are poised to feel a bit poorer, especially in Western Canada, the review warned.

“With possible further decreases in financial asset prices and continued slowing in house price increases, the financial position of the Canadian household sector is likely to deteriorate going forward.”

Still, the Bank of Canada is not too concerned. Net worth rose 6.4 per cent in the second half of 2007. Loans in arrears are still at historically low levels. And the personal bankruptcy rate is stable.

“Aggregate indicators of household financial stress continue to suggest that the Canadian household sector is in good financial health,” the bank says.

Consumers and banks are well positioned to handle a bit of deterioration, the central bank said, but their mild discomfort will quickly become intense pain if the U.S. downturn turns into a protracted recession.

That probably won't happen, the bank added, but if it does, the implications for Canada are major.

A long U.S. recession would bite into financial market liquidity again, and force another round of de-leveraging, as well as a “sharp” drop in the U.S. dollar. The effects would spill over into the rest of the world through trade and through financial markets. Commodity prices would be vulnerable.

For Canada, this scenario would mean lower profits for exporters and a spill-over effect on the broader Canadian economy. Banks would have to take further writedowns, while their loan losses would rise, and their capital ratios would be hard hit.

Credit conditions for Canadian businesses and consumers would tighten significantly, defaults would rise, and consumer wealth would drop, especially in the West.

“While the probably of such outcomes materializing is relatively low, they nonetheless warrant careful consideration by financial institutions because of the potentially large negative repercussions,” the central bank said.

Wednesday, June 11, 2008

Inflationary Pressures not as great as Bank Of Canada fears

For those of you on variable mortgages, looks like your payments are going to go down some more over the next year. The Bank of Canada uses Inflation to make its rate decisions and most commentators are suggesting Inflation should continue to stay low. This is good for Vancouver Real Estate. BC and Vancouver's economy is still in good shape from high natural resources prices and with rates coming down, look for more fuel for Vancouver's real estate market.

Inflation? New reports suggest otherwise

Globe and Mail Update

OTTAWA — Inflation? What inflation?

A day after the Bank of Canada said it would no longer be cutting its key interest rate because it was bracing for significant inflationary pressure, two new indicators released Wednesday suggest that what little heat there was in the Canadian economy is actually abating.

The new housing price index, which feeds into the much-watched consumer price index, slid significantly in April. Prices for new homes rose 5.2 per cent between April 2007 and April 2008, the slowest pace in more than two and a half years.

And more slack opened up in the industrial sector in the first quarter too. Industries were operating at just 79.8 per cent of full capacity during the first three months of the year, marking the lowest level in 15 years.

“Disinflation evidence shines through in two Canadian releases today that shed doubt on inflation fears in Canada,” said Derek Holt, economist at Bank of Nova Scotia.

He thinks the central bank will have to reconsider its decision to end its rate cuts. Since inflation is not much of a threat in Canada and the economy seems to be weakening, the Bank of Canada will have to return with more cuts later this year, he said.

The slide in the new housing price index is more proof that the housing market is cooling off in Canada, economists said.

“The report adds to the growing body of evidence that indicates that the Canadian housing sector may be coming off the boil,” said Millan Mulraine, economics strategist at TD Securities.

And the cutback in capacity use in the industrial sector is “further evidence of the retrenchment in economic activity in Canada,” he added.

But Tuesday, the Bank of Canada said it had already done enough to help the stagnant economy, and was now joining the rest of the world in focusing instead on keeping inflation under control.

The central bank aims to keep inflation at a 2 per cent pace, but price increases have been running below that level lately. In April, total annual inflation was 1.7 per cent and core inflation, which excludes volatile prices, was 1.5 per cent.

The Bank of Canada normally pays more attention to core prices, which it has said will remain below 2 per cent for the long term. But it is clear that the central bank has now switched to focus more on total inflation and is worried about the effect of soaring energy prices.

The bank warned that if energy prices stay high, total inflation will rise to about 3 per cent.

Plus, in a separate report, Bank of Montreal is warning that the disinflationary pressure from the strong dollar appears to be coming to an end. The strong dollar has prompted some retailers to cut the prices on some imported goods, especially cars.

But other prices don't appear to be falling to reflect a cheaper import price.

“Looking at a broad basket of items, we find that while there has been some movement in the past year, the price gap remains extraordinarily large, and there are plenty of signs to suggest that the bulk of the discounting is over,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. “In other words, without further pressure, this may be as good as it gets for Canadian shoppers.”

Wednesday, June 04, 2008

OECD Says No Recession for Canada and Hint at Rate Cuts - All Good News for Vancouver Real Estate

Hi All,

There has been some recent economic news using the word recession in relation to Canada. Thank god Canada is not Ontario and Quebec! We here in BC and the West in general will continue to thrive from high natural resource prices and this should keep the Vancouver real estate market in good shape.

Have a look at this article about an OECD report on Canada. It says that Canada WILL NOT go into recession and that the Bank of Canada will be reducing rates which is great news for us involved in the Vancouver real estate market. Like I have said in previous posts, interest rate cuts caused by economic weakness in Central Canada is fuel to the fire for Western Canada's economy already roaring from high resource prices.

I'd love to hear your thoughts!

Continue to cut rates, OECD tells Carney

Globe and Mail Update

OTTAWA — Canada will avoid a recession, but the federal government may dip into deficit, and the central bank needs to continue cutting interest rates to fend off a protracted slowdown, the Organization for Economic Co-operation and Development says.

Faltering exports and trouble in the manufacturing sector have already pushed the pace of Canadian economic growth down significantly, and the economy won't recover until a year from now because the U.S. slowdown is expected to persist, the OECD said in its economic outlook Wednesday.

“But no recession is expected,” the organization stated.

Canada's economy shrank 0.3 per cent in the first quarter, at annualized rates, the first quarterly contraction in five years. Many economists have warned that the second quarter could be equally as weak.

The popular definition of a recession is two consecutive quarters of economic decline, but economists hesitate to describe Canada's economy as recessionary, since the contraction has been slight so far, and job growth remains solid.

The OECD projected growth of 1.2 per cent for 2008, and 2 per cent for 2009. The projections are close to the average projection of private-sector economists.

Still, the economy is weak enough to warrant more rate cuts by the Bank of Canada, the OECD said.

“The monetary policy easing that started in late 2007 needs to continue in order to offset the likely protracted slowdown in the U.S. economy, the impact of the currency appreciation as well as the consequences of financial-sector stresses in the real economy,” the outlook stated.

It's not clear the Bank of Canada will follow that advice. Governor Mark Carney has hinted lately that the aggressive pace of rate cuts that marked the beginning of this year has come to an end, and he now has a wary eye on inflationary pressure.

Economists expect a small rate cut of a quarter of a percentage point next week, but aren't sure where Mr. Carney will head after that.

The OECD also warned Canada's current account will “dip deeper into deficit” mainly because of falling exports.

But economists in Canada are not worried about the current account. Canada initially recorded a small deficit in the fourth quarter of last year, but it was revised away last week. And now, with oil and gas prices soaring, Canada is in solid surplus territory again.

The OECD assumes an average oil price of $120 (U.S.) a barrel - in line with many other economic forecasts.

The OECD also warned Ottawa “may show a small deficit,” as tax cuts and taxes paid by struggling business eat into government revenue.

“Governments will need to hold the line on spending to keep their budgets close to balance,” the outlook states.

But again, economists in Canada don't see the fiscal situation unfolding that way. While output in Canada has stagnated, high oil and gas prices are bringing huge amounts of money into the country, pumping up corporate profits and income.

Nominal gross domestic product is strong, and that's the base Ottawa uses for taxation.

Plus, Ottawa's auction of wireless spectrum this week is bringing the federal government more than $2.5-billion, money that was not included in the last budget, and surpassing the government's internal projections.

At least one economist read the OECD recommendations as a hint of what the Bank of Canada will do next, since the OECD outlook is put together after extensive consultation with government officials.

Ted Carmichael, chief economist at J.P. Morgan Canada said the OECD comments “should be viewed as an indication that policy-makers continue to see further cuts in the policy rate as necessary to offset the strong headwinds provided by the expected protracted U.S. slowdown, previous Canadian dollar appreciation, and the continuing impact of credit market distress.”

The OECD report urges central bankers to put more weight on the slowing economy than on inflationary pressure, Mr. Carmichael said. And the OECD outlook “is usually a view that conforms with the official policy consensus in Ottawa.”

The OECD is essentially recommending that the Bank of Canada cut rates by as much as 75 basis points in the months ahead, added Stewart Hall, economic strategist at HSBC Canada. That's on top of the 150 basis points in cuts already undertaken since December.

(A basis point is one one-hundredth of a percentage point.)

Markets, however, are only pricing in a rate cut of 25 basis points next week, and not much action beyond that, Mr. Hall said.

Tuesday, June 03, 2008

The Importance of Proper Pricing in Today's Vancouver Real Estate Market

Hi All,

The Downtown Vancouver Real Estate Market is changing. This time last year there was so much demand and so many buyers, a very nice over priced listing would get offers that would eventually cause the listing to sell at or near market value.

Today the situation is different. There are 25% more listings and the same amount if not less buyers. This added competition for buyers means over-priced listings that are quite nice will sit on the market and will not get offers.

There are many buyers out there that don't realise that price is negotiable (really) and there are also buyers who realise price is negotiable, but feel it rude or intimidating to put in an offer less than the asking price. The there is the final group of buyers who just disregard an over priced listing as they see the time and effort to bring the buyers around to market realities as a waste of time.

Suites are still selling in Downtown Vancouver. The ones that sell the fastest for the best prices are those that are listed at or near market value and are well decorated and in good condition.

Pricing High with hopes of getting an offer doesn't work in today's market.