Random Items

A cornucopia of things for you as I press my nose against the window of the world today. It's also only 7 days before the Games.

Olympic Games

Since I will be in Downtown Vancouver during the Games, I hope to bring you some streetshot photos of things going on outside the venues - no promises though.

Less than flattering news articles on the downtown eastside continue. Here's one from the Globe and Mail.

Meanwhile the lack of snow on Cypruss is fodder for the late night talk show circuit. I mean, honestly, anyone who lives here knows that it's no great surprise there is no snow locally in February. Why on earth isn't every alpine event up at Whistler?

A sports segment on ESPN shared that sentiment when talking about Cypress Mountain. The host of the segment said, "This isn't the big downhill mountain, this is some dopey little mountain where they're going to hold their little dopey X Games events."

Sigh. Too true.

Interest Rates

The people at the Council on Foreign Relations speculate that US interest rates on Treasury debt will be increasing around the end of the first quarter if the Fed discontinues its monetization of mortgage debt.

As the Fed has essentially purchased ALL new US Treasury issuance since 2009, that seems to be a reasonable bet (hattip: Jesse's Café Américain).

• "The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie Mae and Freddie Mac by the end of the first quarter.
  
  This is not only likely to push up mortgage rates; Treasury rates should rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds to buy Treasury's.
  
  Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major source of demand in the Treasury market.
  
  As the chart shows, since the start of 2009 the Fed has bought or financed the entire increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will have to move up to attract new buyers."

PIIGS

Gold has plunged downward as the US dollar surges against the Euro yesterday and today.

Why is this happening? The big story is the sovereign debt concerns of the impolitely nicknamed PIIGS. The PIIGS are Portugal, Italy, Ireland, Greece and Spain.

Driving the flight to the US dollar is concerns focusing on debt to GDP percentage of these countries.

What's so truly bizarre, however, is that the United States stands directly in the middle of the PIGS nations on the debt to GDP percentage scale!

In the US, state after state is facing serious budget problems. The latest is Connecticut as this report notes. "The signs of economic distress are everywhere -- in our towns, our homes, our businesses and places of worship. Connecticut residents are paying attention, and elected state officials who ignore what they are telling us do so at their own peril. If we thought that passing a state budget was difficult last year, just wait. This year's three-month legislative session will be brutal."

So... if the argument against the PIGS is the debt to GDP percentage. The exact same argument would place the US dollar in a crisis position.

Not to hard to see what lies ahead here.

It's becoming a race to the bottom, which ultimately is what makes currency values what they are. Watch for similar arguments about the size of the debt to GDP ratio to soon batter the US dollar.

Froogle Scott Chronicles

The next two instalments of the Froogle Scott Chronicles are out over at VREAA.

Part 2: Up, Up, Up: Winning the Real Estate Lottery can be read here.

Part 3: Priced Out Forever? Vancouver Renters and Basement Suites can be read here.

That's it for now. Updates may or may not be added.

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The world and it's view of Vancouver

I have lived in this city for almost 40 years now.

And there is one thing that has always stood out for me... and that is the dramatically different perception you can have of this city based on the way you travel to the downtown core.

Drive down Granville or Cambie Steet, and the city rises up on a sunny day as a spectacular jewel nestled against the mountains.

Drive along Kingsway or Hastings, and the city is a slum.

That dichotomy will take on mythic proportions in the coming weeks.

I can't find the link right now, but I read one account of a journalist visiting Vancouver and he talked about his anticipation in seeing this fabulous city. But leaving his hotel in Burnaby, he would drive down Kingsway and loop around the downtown eastside, never finding the Vancouver of the travel magazines.

I know exactly what he means.

Next week NBC will broadcast Vancouver to the world. Now, Dick Ebersol (of NBC Sports) has already made it clear that the main network of the NBC will do nothing but display Vancouver in all it's stunning glory. NBC does that with every host city.

But contrast that approach with this article from MSNBC.

For those who think the Olympics will be a non-stop real estate advertisment for the Village on the Edge of the Rainforest, this is a taste of what many media outlets will be reporting this week.

• Canada’s Olympic city has notorious skid row
  Vancouver’s darker side emerges from district known as ‘Pains and Wastes’
  
  (note to NBC headline writer: that's 'Pain and Wastings' - the writer gets is right in the article)
  
  VANCOUVER, British Columbia - Five blocks away from the venue for Vancouver's Olympic opening ceremonies, four grizzled addicts huddle in the rain, injecting themselves with heroin behind a trash bin.
  
  Welcome to Downtown Eastside. Here, life is gritty, volatile and the slightest misstep can invite brutal retaliation.
  
  "It's a jungle," said Glen, a 49-year-old heroin addict who goes by the street name Trouble. "You want to get out of here."
  
  As Vancouver prepares for the Olympics and the descent of the world's media, the Downtown Eastside remains a huge problem — 15 square blocks of despair, squalid rooming houses and alleys populated by thousands of addicts, the homeless, the mentally ill and the drug dealers who prey on them.
  
  This neighborhood is the most concentrated drug and poverty ghetto in North America, with high use of heroin, cocaine and methamphetamine, according to criminologist Benedikt Fischer of Simon Fraser University. It's also the only place in North America where drug addicts can shoot heroin into their veins at an officially sanctioned injection site.
  
  'Pain and Wastings'
  
  At the center of the neighborhood is a neoclassical building endowed by philanthropist Andrew Carnegie in 1903. Behind it, dealers and pimps hawk drugs and women in a filthy alley. And on its front steps is Vancouver's largest open-air drug market, at the intersection of Main and Hastings streets— dubbed "Pain and Wastings" by locals.
  
  Across the street is Vancouver's biggest police station. Police Const. Lindsey Houghton said officers often find themselves in the role of social workers while continuing to target the drug trade. About 49 percent of Downtown Eastside calls are related to mental health, according to the Vancouver Police Department.
  
  "It's a tremendous challenge that goes beyond the traditional scope of policing," Houghton said.
  
  The International Olympic Committee's bid evaluation team didn't see the Downtown Eastside when it assessed Vancouver's bid in 2003. When it came time to tour Vancouver venues, the IOC's bus took a wide detour around the neighborhood.
  
  The bid evaluation team did see the scenic but treacherous highway from Vancouver to Whistler, host of alpine and sliding events. While about $500 million has been spent on the road, the Downtown Eastside remains much the same.
  
  As they did in 2003, welfare recipients still line up once a month to receive their welfare checks. Welfare Wednesday is known as Mardi Gras in the area, the recipients called "two-day millionaires." Needle exchange staff work on the welfare lines.
  
  'Insane'
  
  The area gained international attention when pig farmer Robert Pickton was arrested in 2002 and charged with the deaths of 26 prostitutes and addicts from the Downtown Eastside, in what police say is Canada's worst serial murder case. He killed and butchered them at his suburban farm. Some remains he fed to pigs. The rest went to a rendering plant.
  
  Mona Wilson's head, hands and feet were found in a bucket at Pickton's farm. Her brother, Jason Fleury, called the Downtown Eastside a time bomb and accused officials of doing nothing to defuse it while spending millions on the Olympics.
  
  "It's crazy. It's insane," Fleury said.
  
  Prostitution rights activist Jamie Lee Hamilton said little has been done to curb violence against prostitutes since Pickton's arrest.
  
  "There is this perception that all the violence ended when Pickton was arrested," Hamilton said. "We know it's hunting grounds down there, and we're doing nothing about it. The women, the men and the transgendered are living prey."
  
  Due in part to rampant intravenous drug use, the area's HIV rate is the worst in the developed world, said International AIDS Society president Dr. Julio Montaner. The HIV rate qualifies the Downtown Eastside for World Health Organization epidemic status, he said.
  
  Montaner said the combination of drug and health programs as well as housing initiatives are beginning to slow the crisis. But progress may be halted by the increasing violence of Vancouver's drug trade, as cocaine prices skyrocket in the wake of a Mexican drug-cartel crackdown.
  
  Critics allege the Downtown Eastside will be sanitized during the Games under recently passed legislation that allows police to force the homeless into shelters in cold weather. That would violate bid assurances, they say.
  
  "Nobody has a right to move those people simply to accommodate a better visual image for the Olympics," said provincial legislative housing critic Shane Simpson.
  
  Vancouver Organizing Committee vice president of sustainability Linda Coady said the issue has nothing to do with the organizing committee, and that VANOC's interest is what goes on inside Games' venues.
  
  "Outside is the domain of the Vancouver Police Department," Coady said.
  
  Meanwhile, the safe injection site in the Downtown Eastside is the busiest in the world, with about 500 supervised injections a day, according to Insite supervisor Russ Maynard. Addicts shoot up at 12 booths with mirrors on the walls so that nurses on a raised platform can see them.
  
  Maynard said by the time an addict gets to the Downtown Eastside, they are totally dysfunctional. Even trying to get help is hard, he said, as pay phones are used constantly to make drug deals.
  
  "You could get beat up for tying up a phone for five minutes," he said.
  
  He said 90 percent of people using Insite have Hepatitis C. The national rate is less than one percent.
  
  Insite has operated for six years under an exemption from Canada's health laws. The federal government's attempt to close Insite ended Jan. 15 when the British Columbia Court of Appeal ruled addicts had a constitutional right to health care. Whether the case winds before in the Supreme Court of Canada remains to be seen.

MSNBC has taken a realistic, cold, hard look at the real downtown Vancouver. The view that so many locals simply refuse to acknowledge and put blinders on for.

Somehow I don't imagine excerpts of the MSNBC story making it's way into any Bob Rennie literature on the Woodwards development.

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Gathering Stormclouds

It comes as no surprise to readers of this blog to know that I firmly believe that higher interest rates loom in the not too distant future.

And when that circumstance comes to pass, Canadians are gonna get crushed financially.

Just look at how much debt Canadian households are carrying relative to their personal disposable income.

We like to say we are different from Americans, but it's hard to buy into that malarkey when you study the Bank of Canada (BOC) data. According to the BOC, the debt-to-income ratio of households in this country stood at 142% in the second quarter of 2009. That means for every dollar Canadians earned, Canadians owed $1.42 in debt.

In 2005 that figure stood at 116%.

Not only is that debt level exploding, but the BOC estimates that the ratio will rise to 160% in two years!

That's basically where it is for American households. And when it comes to household debt relative to GDP, Canadians and Americans are already neck and neck.

Shockingly, Canada is virtually the only country where households have taken on more debt during this recession. While total household debt in foreclosure-ravaged America shrank 1.7% over the last year, debt levels here jumped 7%. According to Statistics Canada, in November personal lines of credit surged 20% from the year before, loans for home renovations were up 31%, and balances of credit cards jumped another 6.9%.

But by far the most interesting statistic is that, in dollar terms, most of the increase in household debt has come as the result of the huge mortgages people are taking out to buy homes at today’s soaring prices. Over the past two difficult years of the economy, the total residential mortgage debt load in Canada ballooned 18.

“We’re the anomaly in global markets,” says Derek Holt, an economist at Scotia Capital. “We continue to climb to new highs with house prices and we haven’t seen any deleveraging among households. What’s so special about Canada that we should be experiencing this while every other industrialized economy went down and stayed down?”

Now we've talked at length here about how the BOC has been pounding warning drums to warn Canadians not to get used to the abnormally low interest rates of the last year.

And the 800lb gorilla in the room is those skyrocketing debt levels.

When interest rates begin to rise from their record lows (have I mentioned how this is, IMHO, a certainty?), borrowing costs will rise and hundreds of thousands of Canadian families will face a brutal cash crunch.

How bad is it going to be?

Recall that the BOC conducted a series of theoretical stress tests to see how Canadian households will fare should interest rates rise.

I wasn't aware of the values applied, but I am now advised that the stress tests analyzed what would happen if rates rose between 3.2% and 4.5% by mid-2012.

With the BOC benchmark rate currently at just 0.25 per cent, that is a sizable jump. And when a household’s debt-to-service ratio, a measure of monthly payments relative to income, breaks past the 40% mark, it’s considered to be “financially vulnerable” to financial shock.

What the bank found in its review was that if rates rose to the higher level, 9.6% of households would find themselves in that danger zone.

Amazingly, the BOC's test scenario of a jump in rates to even as high as 4.5% would still leave mortgage rates low by historical standards. Especially if, as many fear, the trillions of dollars in emergency liquidity that’s been pumped into the economy sparks inflation. But according to Ian Lee, a former mortgage banker turned Carleton University professor, given today’s insanely low levels, rates don’t need to jump that much to wreak havoc on Canada’s debtor class. “I was in the industry when mortgage rates went through the roof and I was throwing middle class owners out of their homes,” he says. “We’ve seen this movie before."

Yes we have... and it wasn't pretty.

In fact we only have to look across the Pacific Ocean for a preview of how our future will be playing out.

In this Bloomberg story we get a glimpse of what is happening in Australia. The Aussies, like Canada, took emergency measures to stave off a collapse in their real estate industry.

And just like in Canada, the result was rampant price speculation in real estate.

But when the incentives to buy ended and now that interest rates have risen (the Australian central bank rate is now 3.25%), the Australian real estate market is starting to get hit.

As the Bloomberg story notes, rising rates are starting to trigger default conditions on Australian mortgages.

Last week a survey found 45% of all buyers who purchased in the last 18 months are under severe mortgage stress, with many forced to use credit cards to keep up their home loans.

And - what a surprise - when we take a closer look we find that Australians have a debt-to-disposable income ratio of 156% - almost identical to Canada's (145%).

The scary thing is that the 3.25% Australian central bank rate is nowhere near to topping out.

Australia is just starting to feel the pain.

Meanwhile ours looms ominously on the horizon.

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Casting long, long shadows on Groundhog Day (updated)

It's been a busy week so you will excuse the absence of posts. And as the games approach sporadic may become the norm, so I apologize in advance.

Interesting phone call from a colleague on the weekend. He reads the blog and was keen for my comments on the plunging price of gold.

Was I wrong about my prediction for 2010?

"Nope!"... I told him in that a 'matter-of-fact' way.

In what will become the theme of the 2010's, the American President has started to discuss the fundamental issue of our time: American debt.

Obama's candor on the issue this week lead to this article in the New York Times which analyzed Congressional Budget Office reports going back almost a decade.

The Times was trying to understand how the federal government came to be far deeper in debt than it has been since the years just after World War II.

The article included this terrific chart demonstrating succinctly the endless abyss that the actual US budget is becoming. It shows just how deep the sovereign debt rabbit hole goes. (click on image to enlarge)

Their observation? "This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it."

Those American politicians who paint rosy expectations for a surplus are dreaming in technicolour - the likelihood that the US can claw its way back out of the hole at this point are slim to none. Even David Gergen, presidential advisor during the administrations of Nixon, Ford, Reagan, and Clinton, was moved to comment on CNN yesterday that the debt is massive and threatens to trigger a dollar collapse and/or bankruptcy. He doesn't see either side - Democrat or Republican - having the political will to deal with the problem.

Meanwhile, at the other end of the spectrum, there is the US Federal Reserve.

Chairman, Ben Bernanke, is brewing further sorcerer-style plans to hopefully control and manipulate interest rates. The latest this weenie is now considering involves adopting a new benchmark interest rate plan to replace the one they’ve used for the last two decades.

The Fed is floundering for a way to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check. Policy makers are concerned that the Fed funds rate may fail to control inflation as the economy recovers.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The choice of a benchmark is the “front line of defense against inflation, and also it’s at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery,” said Marvin Goodfriend, a former Fed economist.

In the past, the Fed had controlled the prime interest rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers.

What the Federal Reserve is planning to do is pay banks a higher rate on interest on the funds the banks have been given in these bailouts, so that the banks keep the money at the Federal Reserve. By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

“In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve,” Bernanke said in an October speech in Washington.

But as William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro said, there could be complications to using the deposit rate. "Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed."

As the world loses confidence in the United State's finances, there are so many variables introduced that the Federal Reserve is playing with matches as it sits on a massive powderkeg of stimulus money.

I guess it comes down to having supreme faith in Bernanke's ability to predict what is coming and dance his way around it successfully.

And Ben's foresight is Stirling, isn't it?

One of the main problems is that Bernanke is only focused on money supply, and only on the money supply in the bank reserves.

But money supply is relative to demand, and potential money supply to potential demand.

There is a funny thing about potential money supply. It can grow quietly in assets, stored in investments and other less repositories of value, and then spring into action relatively more quickly, when wealth is converted to money, the medium of exchange.

Is is well known that many banks are playing the carry trade with funds freed up by having Fed money on reserve (and with the money they are generating for themselves from the interest the Fed is paying on those reserves). The huge profits they are collecting do not get stored in the reserve funds they have been given.

At some point they will inject this money into the economy in the form of lending. How will the US Federal Reserve control THAT when these funds start to enter the money supply?

(Answer... the exact same way Volcker did in the late 70s, early 80s).

Monetary inflation is deceptively simple, and immensely more complicated than the average person can allow, and the pundit will admit.

As another blogger I follow posted:

• "Debt/credit are one means of financing the enterprise. There is also equity. But a wise person will look at the organically generated flows of wealth in valuing the shares. Are you consuming more than you are creating? What are the future prospects for this flow of wealth? If there is no prospect of net positive wealth creation, then you are living on borrowed time, in a castle of sand, no matter how good the accounting tricks you are using to hide it from the shareholders.
  
  One might look an an unconnected car battery and say, 'oh look it is benign.' But grab hold of each of its terminals with your bare hands while grounded, and see what happens then. And gold is in part measuring that potential, for the Fed and the monetary base and a resurgent economy to generate monetary expansion. There are lags of years involved in the process.
  
  And this is the nature of Bernanke's challenge. He must at some point allow the economy greater access to his excess monetary reserves, and the swollen monetary base, but try to prevent the dollar and the bond from igniting. And gold is where the prudent seek at least a partial refuge while the central bankers conduct their experiments."

If there is one thing you can be certain about is that there is going to be great volatility in the coming months and years. And there is nothing investors love more than volatility, right?

That's why the price of gold sprang back up $35 an ounce in the last day and a half, and why I'm not the least bit concerned about the strength of my prediction for it to rise over $2000/ounce... or my prediction for the cripping rise in interest rates that will hit us in the years ahead.

Both are coming.

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Posts will resume tomorrow.

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Email: village_whisperer@live.ca
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Olympic Bounce?

Hmmm, what a surprise.

Seems that Tsur Somerville, a professor in real state estate at the University of British Columbia, has just poked a hole in the Olympic R/E speculative bubble.

In a recent study Somerville analyzed house prices and construction employment in the years leading up to and after the Olympics in Australian, Canadian and U.S. cities.

The conclusion?

Cities that win Olympic bids experience neither boom nor bust in real estate prices but they get a boost in construction jobs.

"We do not find support for the argument of host city backers that the Olympics delivers positive economic benefits, nor of the arguments made by opponents that there is some post-Olympic bust," Somerville said. "Our results conclusively demonstrate that while construction employment dramatically increases in the period prior to the Games, house prices are the same as they would be in the absence of the Games."

The study comes as the second slap in a double whammy of bad news for speculators.

Last week we heard how all those who loaded up on real estate in hopes of capitalizing on renting out during the Olympics are finding that their units are sitting empty, both in Whistler and Vancouver.

And now the anticipated land rush after the Olympics is being exposed as a myth.

Who could of known?

Guess the government should compensate them, eh?

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Vancouver is Number 1!

So the big news yesterday was the release of the latest Demogaphia survey which compares house prices in Canada, the US, the UK, Australia and elsewhere in the world.

The result? Vancouver is declared the most unaffordable housing market in the world.

Now faithful readers know that our little Village on the Edge of the Rainforest is North America's most bubbly city and Demogaphia now portrays us as the most bubbly in the world. But don't expect that to change local perceptions.

The Bull vs Bear debate on the wet coast will remain unchanged.

Bears will hail the news as further proof that fundamentals are out of whack. And Bulls will counter that the Bears don't understand Vancouver fundamentals (nor does Demogaphia) and that Vancouver's prices rebounded faster than anywhere else in the world precisely because of those strong 'fundamentals'.

In other words... nothing new.

And it's intriguing to watch how it is starting to make some of the Bears question themselves.

On another blog I like to check out from time to time, the longtime Bear author is having doubts.

Convinced that the 2008 correction was the start of the long anticipated bursting of the bubble (and fulfillment of the boom-bust model); convinction has now given way to self-doubt.

The problem, of course, is that people assumed we were at the peak of the bubble. The 2008 dip in prices was, in reality, just part of the jagged climb to the true peak. The boom-bust model will play out... just not necessarily on the timeline many want it to.

The Vancouver (and Canadian) market was starting to correct in 2008. But that correction was hijacked by the actions of the Bank of Canada and the federal government.

• For the first time in history the central bank rate was cut to just 0.25%.
• Through policy and stimulus programs, the Federal Government engineered mortgages rates in the 2-3% range.
• This was supported with CMHC insurance for anyone leveraging 95% of a house purchase.

What other possible result could come from those actions? It triggered an explosion in demand and the average house price in Canada rose last year by 19%, or twenty times the rate of inflation and average wage gains.

Households in Canada are more in debt than ever before, the economy is stalling, government deficits are giving way to massive looming tax hikes and the pressures are building up.

The end result is not all that hard to predict.

Just the timing of it.

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Sunday Funnies - January 24th, 2010

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What the hell is a 'Froogle'?

Have you ever heard of the Vancouver Real Estate Anecdote Archive (VREAA) ?

It's a unique blog that was started up in February of 2008 to serve as a repository for accounts of what people are experiencing and observing regarding Vancouver’s real estate boom.

For the most part the blog is a giant collection of quotes (with references as to the source) from the greater real estate community.

Yesterday they added an interesting sidebar to their blog.

Billing it as a 'serialized anecdote', VREAA aims to highlight the personal and social effects of the boom through a Vancouver couple who bought a house in September 2003.

'Froogle Scott' is the online handle of the Vancouver homeowner who will share his story.

From the introduction to the series by VREAA:

• "The 2001-2010 Vancouver RE market has affected our city profoundly, and touched many of us in ways that have changed our lives. We started collecting anecdotes here at VREAA out of a fascination for the personal and social effects of the boom. A similar captivation has led a Vancouver homeowner to write of his own experience, and we are very pleased to bring you his serialized account, with its numerous anecdotes. ‘Froogle Scott’ will share his story of buying a house in Vancouver, and the journey that he and his wife have been on since that day in September 2003. In the first episode, we hear the story of the buying itself. Here begins one couple’s multi-faceted experience of this boom."

The series can be found on the main page of VREAA or you can access a permanent link to the series here.

I'm told comments on the entries are welcome, if you are so inclined.

Maybe someone can ask him what the heck a 'Froogle' is.

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Will that be cash or chargex?

Remember those old commercials?

Seems to me it has become ingrained in Canadians to choose the latter.

Maybe that explains why, throughout 2009, we witnessed our housing market rebounding while America's foundered.

Unemployment in Canada has been consistent with that of the United States, but the Canadian economy has seemingly fared better. Perhaps it has something to do with the profound credit numbers Jonathan Tonge posted on his blog this week.

It seems that while Canadian incomes are falling, credit is skyrocketing

According to the Conference Board of Canada, Canada’s income per capita fell in 2008—the first time this has happened since the 1990–91 recession.

The income gap between Canada and the U.S., as of 2008, now stands at $6,400 per person; double what it was in 1984. At $6,400 per person, Americans earn more than 20.2% per person than Canadians.

Yet our economy is doing better than America's... why?

I wonder if it has to do with the fact Canadians are hell bent on spending money they don't have?

Average home prices in Canada are up 20% in 2009.

During the period of April 2008-October 2009, government insured and securitized mortgages (NHA securtized loans)increased by a whopping 67%. Total household credit (consumer credit and residential mortgages) grew 14% or by $165 billion.

Then there is this data. According to the latest release by the Bank of Canada, during the period of February 2008 - November 2009:

• personal loans have increased 19%
• balances on credit cards have increased 14%
• 'other' types of loans have expanded by 14%
• and personal lines of credit have grown 39%

All of this borrowed money has been a massive stimulus on the domestic Canadian economy, but spending on credit like that can't continue forever.

These numbers start to show clearly why the Bank of Canada has forecast that by the middle of 2012, 10% of Canadian households would have a debt-service ratio that is at a severe risk to financial shock.

Americans have taken heed of the 2008 financial crisis and over the past year have increased their average savings rate to approximately 5%.

Canadians, however, are still spending like drunken sailors.

With each passing day it is becoming increasingly clear we have not avoided our day of reckoning here in Canada at all... we've only postponed it.

And when things start to tumble... look out. It's not going to be just real estate that crashes hard.

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Bonus Post: Lehman Bros to disrupt Olympics?

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INTRAWEST UPDATE 3: VANOC denies Intrawest financial woes will impact Olympic skiing events

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INTRAWEST UPDATE 2: Intrawest ULC, the owner of Whistler-Blackcomb, will be put on the auction block February 19th by creditors

INTRAWEST UPDATE 1: Banks seize Intrawest, plan to auction company in middle of the Olympic Games.

__________________________

Interesting article in the New York Post today...

Intrawest foreclosure a threat to Olympics

The drama at ski resort and Winter Olympics venue Whistler Blackcomb may go beyond the competition related to the Games.

Sources tell The Post that creditors holding $1.4 billion of debt on Whistler owner Intrawest are planning to foreclose on the company within the next week and a half, casting a shadow on the resort, which will host the alpine events of the 2010 Olympics. "It will probably happen within 10 days," a source said...

The Vancouver Olympic Committee (Vanoc) guaranteed that it would make Intrawest whole for the time that its events take place at its resorts. But now, according to a source, Canadian officials are threatening to pull that roughly $50 million guarantee. That, the source said, has compelled Edens to privately say he has a legal right to keep the Games from taking place at Whistler.

(Click on link above for rest of article)

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To Infinity and Beyond?

Two days ago I made a comment that "if [interest] rates stay low we will remain protected and secure."

It was a bit of a sarcastic comment because long time readers of this blog know I don't think interest rates are going to stay low at all.

One reader (jungberg) asked, in the comments section, what the chances were that the government will raise rates?

Let's be clear. Rates are going up. The Bank of Canada has sounded enough warnings to Canadians about that very fact to leave not doubt. The only question is: how high will they go?

I think without US intervention (more on that in a bit) they will go far higher than Carney would like... and he won't be able to prevent it.

It all has to do with the cost of money.

All Western governments are in record states of deficit. The global competition for money is about to heat up the bond market.

What's keeping things down right now is Quantative Easing.

Your mortgage rates are directly tied to the yields of the sale of US Treasuries, and right now those yields are artificially low. Very low.

They have been manipulated that low by US Federal Reserve intervention throughout 2009.

Three weeks ago we talked about a report from Eric Sprott, the Toronto-based money manager, which pointed out that the actual number of US Treasuries being sold to foreigners in 2009 was next to nothing and that the purchase of those Treasuries by the Fed was far higher than originally acknowledged by the government.

Of the $1.75 trillion in 2009 US Treasuries sales, only $200 Billion was actually bought by entities besides the US government.

As Sprott pointed out, the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing.

In 2009 we had a situtation where the US Federal Reserve was printing far more dollars to buy Treasuries than they 'officially' announced they had planned to do. This amounted to a means of faking the Treasury's ability to attract outside capital. Since the US bought the vast majority of it's own Treasuries, the yield (interest rate) was kept artificially low. Only $200 Billion was actually sold to investors.

In 2010, the United States needs to fund $2.21 Trillion worth of Treasuries sales. Since $200 Billion of those Treasuries will be absorbed in the 'official' conclusion of Quantative Easing, it means in the 2010 fiscal year (November 2009 to October 31, 2010) the US will have to sell $2.01 Trillion in debt to the rest of the world.

So who going to buy them if there weren't enough buyers in 2009?

Either interest rates are going to have to jump dramatically... or the US is going to have to embark on Quantative Easing to Infinity.

Since November 2009 marked the start of a new fiscal year, we can now start to answer that question.

And the first bits of evidence coming in are disturbing.

Yesterday the latest US Treasury International Capital Flows data covering November 2009 were released (the date is about two months behind the current month).

The data reveals a huge surge in capital flows predominantly as a result of a massive buying binge in US Treasuries. The implication is that there is, presumably, a strong market for the purchase of US Treasuries.

The surge in purchases is so strong that the November data is the largest amount of purchases for any month since 2005 (reference this analysis by Jim Sinclair's Mineset).

(Note: the previous high in purchases of US Treasury's occurred during the month of June 2009 when $100 billion worth of Treasuries were purchased on net)

November 2009 topped that by another $18 billion. So all is good, right?

Not so fast.

Dan Norcini, who did the above referenced analysis, had the following comments:

• "Strangely enough, when you look into the breakdown of the Treasury buying by country, we see a decrease in the biggest buyer of US Treasuries, namely China. They sold about $9 billion worth. Japan compensated for that by buying another $11.4 billion. The biggest increase however came out of Great Britain where some $47 billion were added. Keep in mind that London is often the primary conduit through which foreign entities affect purchases of US Treasuries for the purpose of secrecy as that information generally does not get revealed until the Treasury revises the TIC data in June of each year.
  
  Call me cynical but we really have no idea who actually bought all those Treasuries through London offices.
  
  In times past the revisions have seen many of those purchases being credited to China but that does not guarantee anything of the sort this time around, especially with China being a net seller this month.
  
  We also have a decent sized increase in Treasury buying out of those Caribbean based banks.
  
  Were it not for the binge in Treasury buying, the Agency, Corporate Debt and Equity categories would not have been sufficient to fund the negative balance of trade. This of course will be spun as a vote of confidence for the US Dollar as the spinmeisters will step up and proclaim that the world still has a strong appetite for US debt. Personally I think the Fed is buying the Treasuries."

Norcini's suspicions can't be confirmed until the June numbers come out. Last year the US Federal Reserve wasn't forthcoming with the true extend of how widespread and extensive the purchasing of their own Treasuries was, so it's not that much of a stretch to imagine the same deceptions are playing out again this year.

And Sprott called what was going on in 2009 a virtual 'ponzi scheme'.

If the Fed has embarked on QE to infinity - look out. Spiking interest rates will be the least of our worries if that's the case.

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The pressure ploy

Pressure Ploy or 'marketing'?

I started off the year telling you about James Schouw, Chairman of James Schouw and Associates. Schouw specializes in ultra high-end custom developments.

Schouw is keen to promote the old supply and demand argument about Vancouver. To wit: people are constantly moving here, no one is leaving, scare land results in a property shortage... ergo buy now or be priced out forever.

Central to the argument is the wealthy Asian component. They have money, it's nice here and they can afford it even if we can't... end result: real estate is going up, up, up.

Lest you think that last dynamic is self developing, you might find this of interest.

XinhuaNews is a Chinese news organization.

Recently, infamous local realtor Bob Rennie hooked up with XinhuaNews to do a little local promoting. The result was this little gem in it's english online site.

Rennie is keen to leverage the wealthy Asian angle and work the exposure of the Olympics to ensure the Asian influx to Vancouver intensifies.

As part of his campaign, Rennie seeks to separate Vancouver from other Olympic cities and tells XinhuaNews in an exclusive interview that:

• "When people watch the Winter Olympics, I don't think they say 'I want to buy a house in Turin' or 'I want to work from Lillehammer'." (referring to the Italy and Norway cities, respectively, that hosted the Games in 2006 and 1994). "But they do for Vancouver. This is one of the most amazing cities on the planet to work from."

Rennie strives to assure Asians that now is the time to buy. He discounts an Olympic hangover and moves to a full court press to convince them that there is a shortage of rental housing in the City.

• "Vancouver is going to face a shortfall of apartment units following its hosting of next month's Winter Olympics Games... If there was ever going to be an Olympic overhang we took care of it in 2008-2009 by canceling buildings. We are now coming into a shortfall where banks are very conservative, Canadian banking practices are always very conservative, and developers are just coming off the sidelines."

Rennie hastens to predict that by the first quarter of 2011 the shortfall in apartment units will be noticeable in downtown Vancouver as there were very few major sites left to develop. Also, with a lot of "money on the sidelines" earning low interest, coupled with a low supply of available properties, extreme pressure will be put on the real estate market.

Vancouver is then portrayed as a virtual licence to print money.

• "The unique thing about Vancouver is nobody builds rental towers (anymore). For the offshore investor properties are easy to rent out as there is no rental stock."

So there you have it. If Vancouver is being too unaffordable for it's current residents to afford, what does the ambitious realtor do?

He finds customers in other parts of the world who will keep these values rising.

As Rennie says,

• "With the amount of money being made in China, and with the acceptance of China to Vancouver, we have to be in the top two places on the planet for China to look at, to move money to. We see it happening right now, it's happening a lot. It used to just happen in the luxury market, now it's happening in all the market."

Rennie even plays the 'buy now' card with the Asians as he tells them:

• "That's the danger of the Olympics. As the world sees [the Games on TV], they go from 'I want to spend two weeks in Vancouver', to ' spending two to five months in Vancouver', to 'I want to send my children to school here'."

So there you go, China.

Buy real estate in Vancouver now... or be priced out forever (what the hell, it worked on most of us who actually lived here, why not the Asians).

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Our Achilles Heel

I find it fascinating to watch how so many people think the Canadian real estate collapse is all but over, the fall in values last year merely a hiccup.

Twelve months ago many speculated that Canada's housing market would inevitably follow the U.S. into the same sort of catastrophe that began there more than three years ago.

But after a brief dip, Canadian real estate is up an average of 19% from a year ago, perching at about the same elevated level it reached at the 2008 peak.

Even more intriguing has been the number of media articles that reinforce what bloggers have been saying all along; that these levels are unsustainable because average incomes are rising at a small fraction of this pace.

But while article after article points out the basic economic fact: when prices rise faster than incomes for long, homes become unaffordable, sales falter, prices stagnate and ultimately values fall sharply... the general sense of euphoria is unshakable and the sense of 'buy now or be priced out forever' reigns.

It's driven by the mantra that says our conservative Canadian banks have saved the day with their stodgy ways and have guided us past the housing meltdown that struck the U.S, Britain, Ireland, Spain and others.

We are bombarded with the rationalization that, in Canada, sub-prime loans represented only about one-quarter the proportion of lending it did in the U.S, and sub-prime in this country had a different meaning: it included people who didn't quite qualify for prime loans, but were never hopeless deadbeats.

We are also told that the securitization phenomenon that let U.S. banks sell dubious mortgages to unsuspecting buyers never developed in Canada. Only about one-quarter of Canadian mortgages were securitized in 2007 (it was 60% in the U.S.), and they were solid, government-insured mortgages, not sliced, diced, leveraged subprime junk.

The 'solid' Canadian banking system saved the day, goes the platitude, and that's why in the U.S. (and elsewhere) near-zero interest rates haven't inflated housing prices. Their banking system is so sick that there just isn't much lending, while ours is healthy.

I've said it before, and I'll say it again... what a crock.

Our day of reckoning hasn't been avoided, it's only been delayed.

The fact is our government threw everything they could at the crisis in order to keep our real estate market juiced and our banks afloat.

• They changed mortgage rules from 10% down and a maximum 25 year amortization to zero down and first 35, then 40 year amortizations.
• Then came emergency interest rates.
• Next, a blatant blind eye has been turned to Canadian banks who are authorizing zero-down arrangements (with their 5% cash back offers) and allowing what amounts to liar loans.
• Then there is the way the government back funded the CMHC and ordered them to dramatically hike their high-risk loan exposure and approve Canadians for loans who normally never would have qualified.
• Then, at the height of the crisis, the Canadian government plowed tens of billions in funding to the banks by buying mortgages so room could be made for more to lend.

That's why credit continues to flow in this country. The Federal government is guaranteeing all that money.

We've thrown so much money at the problem that Kevin Page, the controversial Parliamentary Budget Officer has come out and said that the Federal Government's orginally announced 2 year deficit (since expanded to 5 years) is now worse. He says there's no way we’ll be balancing our books in 2014. It's impossible.

Canada now has a deficit so large it is now structural and will probably be with us for an entire generation.

And what has all of this bought us?

Before the crisis we had a large number of Canadians who assuming massive household debt. With the 'stimulus', Canadians have intensified this trend and many are max'ing out on the size of mortgage they can assume when rates are the lowest in history.

This, in turn, has spiked housing values up 19% in the last year. As Garth Turner noted on his site last Friday, "when inflation is 1.6% and the prime’s 2.25%... it means the cost of shelter increased at more than 10 times the cost of living, and acquiring it put Canadian families in a deeper debt hole than has ever existed before... if the price of food had increased 19% in a year, there’d be a Royal Commission and moms torching Loblaws. If taxes had gone up 19%, we’d be in a revolution. If cars had jumped 19% in price, the dealerships would be abandoned."

It's all considered good, thought, because this 'asset reflation' is what is keeping our nation ahead of the recession curve - for the time being.

Meanwhile outstanding Canadian mortgages have skyrocketed and Canadians now have more debt compared to income than at any other time in our nation's history.

Our nation's Achilles heel sits behind the future of interest rates.

As the Bank of Canada said, "using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase... by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks."

If rates stay low we will remain protected and secure.

But if they go up... look out. The economic carnage in this country will be on par with the physical carnage that has hit Haiti.

'Devastating' won't even begin to properly describe it.

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Sunday Funnies - January 17th, 2010

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Bank Failure Friday

As faithful readers know, bank failures in the US escalated dramatically in 2009. In 2008 there were 25.

In 2009... 140.

The 2009 total was an average of almost three per week and the most failures the United States has experienced in one year since 1992.

Because the announcement of these failures (and the actual take-over by the FDIC) are always delayed until late on Friday afternoons, Friday has come to be known as 'Bank Failure Friday' on many economic blogs.

But 2009 was just a prelude to 2010.

How do we know?

Because the FDIC has already publicly announced that they are preparing for a greater number of bank failures than in 2008 & 2009 combined.

The FDIC has set aside $2.5 billion for the handling of receiverships, almost double that allowed in 2009's budget of $1.3 billion.

The overall operation budget for 2010 has been set at $4 billion, significantly higher than that for 2009, a revised $2.6 billion.

And why is the FDIC preparing for such a huge wave of bank failures?

It's all in the chart at the top of this post (click on the image to enlarge it).

In 2006, 2007 & 2008, the defaults on a large number of resetting subprime mortgages took place (they are shown in mid green).

As the short term teaser interest rate on these mortgages can due for reset to a higher rate, homeowners couldn't negotiate a new mortgage with a new, ultra-low teaser interest rate (as they had done in years past).

That's how subprime mortgages caused the real estate collapse in the United States. Housing values fell in a few cities and when the first mortgages that came due with their ultra low interest rates (set at a two year duration before a higher rate would kick in), homeowners couldn't secure a new mortgage. In the past, because the value of the property had grown, they had always been able to negotiate a new mortgage (with a new two year, ultra low teaser interest rate).

Forced to assume the mortgage at a substantially higher interest rate - they defaulted.

As the market was swamped with a bunch of foreclosures, it drove housing values down across the USA. That triggered the same scenario with other cities subprime mortgages.

As the foreclosures picked up steam, those households with more normal mortgages were trapped because declining real estate values (from all the subprime foreclosures) meant that when it came time to renew their mortgages... they couldn't because the value of the mortgage was substantially higher than the value of the property (called being 'underwater').

No bank is going to give you a $500,000 loan on a property worth $300,000.

Now, looming on the horizon, are Prime, Alt-A, Agency and Option Adjustable Rate mortgages.

These 'normal' mortgages dramatically outnumber subprime mortgages.

Many of them are like sub-prime in that they reset at a higher interest rate, the only difference being they reset after 5-7 years instead of two.

Thus they are just coming due now.

And those who didn't have teaser interest rates that reset are facing the brutal proposition of being 'underwater'.

The end result will be the same as subprime.

The mortgages will reset to dramatically higher interest rates and/or the value of the property has dramatically fallen so renewing cannot be done without the mortgage holders bringing down the principle to the value of the property (which means paying off about $200,000 plus on renewal).

End result: another wave of defaults and foreclosures... which is what is putting all these American banks at risk.

They key element for Canadians here is that subprime was a minor player in all of this. Subprime mortgages were simply the first type of mortgage caught in the interest rate squeeze.

Look at the graph. Subprime mortgages are almost non existent in 2009 and beyond. While about 21% of all mortgage originations from 2004 through 2006 were subprime, when you add up all the mortgages due to reset from 2007 to 2015, the subprime portion of total mortgages is miniscule.

In fact, in June 2008, the total number of subprime mortgages in foreclosure or REO represent (as a percent of total housing units) less than 1/2 of 1 percent of all housing units in the United States (0.44%).

Yesterday we noted how the Bank of Canada has come out and stated that within 2 years 10% of Canadian households will be in danger of collapsing from rapidly rising interest rates.

That represents a higher percentage of all total Canadian mortgages than subprime did vs. the rest of the American mortgage family.

They are the first domino that will be affected by a dramatic change in interest rates.

And just like in the United States, when that first domino falls it can bring down the entire pack.

In Canada we don't have 'subprime' mortgages. But we do have scores of people who have taken on massive debt with ultra low interest rates that will reset. All those five year mortgages will come due for renewal. And if 10% can't handle the shock of a return of interest rates to their historic norm (over the last 20 years, that's a five year rate of 8.25%), then it means we are in a far more precarious position than the United States.

The collapse of that 10% will dramatically lower real estate values when those properties are eventually foreclosed upon and resold. When that happens, a great many of other Canadians will be in a sever 'underwater' position and will not be able to renew... further collapsing the real estate market.

In 2005 and 2006 the majority of the American financial sector ignored the looming threat these numbers represented. The only ones sounding the alarm for what was coming (and the threat it represented to the greater economy) were the likes of Peter Schiff.

In 2010, in Canada, we are just as ignorant.

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Et tu, Mark?

Pontius Pilate was the Roman governor of Judaea from 26 CE to 36 CE; in this capacity, he was responsible for the execution of Jesus of Nazareth.

According to the gospels, Pilate refused to condemn Jesus of Nazareth but was forced to execute him by a hysterical Jewish crowd. In Matthew, Pilate acquiesces to the crowd's demands and washes his hands of the entire affair, reluctantly sending him to his death.

After re-reading last Monday's Bank of Canada speech, I can't help but wonder... is Mark Carney pulling a Pontius Pilate and washing his hands of the Canadian housing bubble?

As mentioned earlier this week, a significant portion of Monday's speech was dedicated to the housing market. Canadians are reminded several times that rate policy is to be used to control inflation, and that housing is only one factor of many that affects inflation.

• “As Canada’s economic growth moves towards its potential, it is expected that a robust housing market, supported by exceptionally low interest rates, will continue to work as an important engine pulling the Canadian economy out of recession. This has implications for monetary policy, which, as I’ve said, aims to achieve the Bank’s inflation target of 2 per cent over the medium term. It’s important to remember that this target is symmetrical; that is, we are equally concerned about whether inflation is above target or below target – as we expect it to be until 2011. The revival of the housing market is one factor that is helping us to achieve our inflation target, and it is a powerful means through which monetary stimulus affects the economy. Of course, we need to keep a close eye on the housing market, along with all other sectors of the Canadian economy, to ensure that we are providing the right amount of monetary stimulus. In setting monetary policy, we view housing – or the exchange rate, the energy sector, the auto industry, or any other factor – through the prism of our inflation target.”

As mentioned in Tuesday's post, after refusing to raise the bank rate to deal with the housing bubble, the Bank of Canada then very deftly laid responsibility for the developing mess in housing directly at the feet of Finance Minister Jim Flaherty.

It came at this point in the speech:

• “An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks. These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance, and a variety of other measures. These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions.
  
  Using these instruments to safeguard the whole financial system – not just individual institutions – is the essence of the macroprudential approach. Macroprudential supervision is one of several concepts in a current global initiative to strengthen supervision and regulation in the wake of the global financial crisis. In Canada, a system-wide, or macroprudential, approach is the shared responsibility of the Department of Finance and all of the federal financial regulatory authorities, including of course the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation. Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

That last line is the killer and it begs the question... what gives?

Carney has, for the past two months, been just like a little blogosphere perma-bear with the alarms he's been sounding on the damage that will be caused by the inevitable rise in interest rates.

He's warned Canadians that they need to be 'prudent' and urged them to remember that "households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates."

Now, in one swift move, he's dropped all of it at the feet of the Minister of Finance.

Why?

I wonder if it has anything to do with this little gem from Monday's speech?

• “Using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase, the simulation generates a scenario indicating that, by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks.”
  

The day of reckoning is coming fast and Carney can see it.

In just over 2 years, the Bank of Canada forecasts that 1 in 10 of us will be in serious debt trouble.

And when the interest rate tide changes, the Canadian financial system is going to drown all of them and pull down many others as real estate values crash.

Seeing what's coming and sensing the inevitable fallout, 'Pontius' Carney has effectively said "pass the soap."

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Bubble? What bubble?

Every once in a while it's fun to compare real estate here on the wet coast with other areas.

One of the things you hear right now is that international demand is going to keep pushing Vancouver values up, up, up.

And who can disagree. Eight months of dreary, endless rain make Vancouver a destination paradise.

And if you had the cash... would you want to live here? Or some crappy local like Hawaii?

Let's compare the two, shall we.

Hat tip to Vancouver_Bear who points out that you can currently procure this little 3 bedroom, 2.0 bathroom, 1,568 sq ft single family rancher home in Kailua. It sits on over 9,000 sq. ft. of land and comes with swimming pool, updated kitchen, indoor laundry, and mountain views.

Asking price $725,000 USD. Here are some photos...

Beauty, eh?

Or you can plunk down an extra $625,000 over and above the 'asking' price of that Hawaiian home and get this four bedroom, 1 bathroom, 1300 square foot dump which could easily pass as the local crack shack. It sits on a 1/2 acre property adjacent to the 401 freeway and just north of Canada Way (another freeway) & Sperling.

Available now for only $1,350,000.

I wonder if the ladders are included?

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