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Baby, we got a bubble!?

Admiral Beez said:
Just had my semi in Cabbagetown assessed for a bank matter and was surprised that its value is more than three times what I paid for it in 1998. Granted I have seriously renovated the place, with new kitchen, finished basement, all three bathrooms refinished, etc, plus in 1998 Regent Park was a real blight, but still I have to wonder if my house is in the bubble too. Not that I care really, I'm keeping this house for ever, and will give it to my kids when I'm gone.
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See Beez that's where our opinions perhaps diverge. It's your precise passion for your home and neighborhood that drives it's value. You're essentially saying that a semi in Cabbagetown is just so appealing that in the relative scale of money you'd much rather maintain your residence there than cash in your chips and move to the sleepy 905 and pocket a small forutne.

I can't disagree meaningfully at all. Look at the desirability of Cabbagetown- scenic streets, parks, safety, proximity to downtown and the enormous culture that exists, restaurants, galleries, access to the DVP and Gardiner. What an incredible neighborhood to call home! And guys, I don't even live there!
 
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brockm said:
As for the solvency of Canadian banks, the way in which Canada measures capital ratios is actually quite apples-to-oranges with the EU and US method; Canadian banks use a risk-weighting formula to determine available capital. And using this formula Canadian banks report capital ratios in excess of 10%. Far higher than their American or EU counterparts. This seems cool, and risk-weighting receives a lot of credibility from the fact that mortgage debt is unescapable in the way it is in theres other jurisdictions. You can't just hand your keys over to the bank -- a fact which gives many analysts great comfort in the Canadian banking system and lends apparent credibility to risk-weighting scheme.

All good. But this risk-weighting assumes that the distribution of risk is such, that a substantial amount of defaults could not simultaneously occur. This is built on the assumption that the vast majority of mortgages are prime, insured by CMHC and are unlikely to ever enter default. However, these assumptions assume a general constancy of market conditions. And these assumptions are not that unlike the sorts of assumptions that US regulators made relative to their situation.

In absolute terms -- actual liquid capital -- Canadians banks are less capitalized than many of their European and American counterparts. In fact, all big five Canadian banks, using the American and European method of capital ratio measurement rank in the bottom ten of biggest 50 banks in the world. In fact, embattled French bank Société Général, has a better absolute capital ratio than BMO, TD, CIBC, RBC and Scotiabank.

Are Canadian banks sounder? It depends. If you assume that Canadian mortgage default rates will never reach levels seen in the US, then I guess they're potentially okay. But if we were to replicate the scale of the American downturn, our banks would be lesser equipped to deal with the losses than even Citibank was. So the "soundness" of Canadian banks cannot merely be measured as a function of the banks themselves, but general assumptions about the soundness of the Canadian economy and solvency of Canadian consumers.

Considering that the average Canadian consumer has the highest debt-to-earnings ratio in the OECD (155%), there may be reasons to question the underlying assumptions of the Canadian banking system.

One also wonders if Canadian lending practices are so much better, why mortgage debt relative to income is actually higher right now than it was for Americans at the height of their bubble.

So the point of my rant is: not everything is what it seems. If you've been living in a bubble for this long, you start to think that what economic activity in a bubble looks like is what's normal. And then policy makers focus on replicating those conditions, which merely re-inflate the bubble and keep it growing over time.

If I had my way, I would end the CMHC and end the Bank of Canada's control of interest rates -- allowing rates to float according to market forces. Which would, actually, bring a rapid and painful end to this debt bubble. But it's going to happen eventually. And the sooner it happens, the less painful it will be.
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Ending the CMHC is one thing. 'Ending the Bank of Canada's control of interest rates' is flat-out impossible. You need to peg to something -- you can go with gold if you wish -- but you can't just 'not have a currency'. In a modern society, you need to have some form of currency.

I'd also like to see a link to some proof about your claim that Canadian banks have less 'actual liquid capital' as I'm not sure what you mean by that. The Canadian banks claim to be already compliant with Basel III, which is supposed to compare banks apples-to-apples around the world. SocGen is not. (Also, to say that SocGen is compliant with ANYTHING given its whack of Greek debt held at 0% risk is stretching the truth to suit your argument, but you are correct that it's not a 'capital' issue.)

And to say that 'Canadian banks risk-weight' and imply other banks around the world don't risk-weight is also flat-out wrong. They may risk-weight different assets differently, but all banks risk-weight assets -- they must in a fractional reserve banking system.
 
Sawe two 'power of sale' homes, one in leaside, another one in Cabbage town - both aren't the best examples of homes in those areas (on'es a town home in a laneway, another is a run down bugalow) but this would be unthinkinable a few months ago....

Maybe those 40 yr 0 down mortgages are begingin to be refused?
 
js97 said:
Sawe two 'power of sale' homes, one in leaside, another one in Cabbage town - both aren't the best examples of homes in those areas (on'es a town home in a laneway, another is a run down bugalow) but this would be unthinkinable a few months ago....

Maybe those 40 yr 0 down mortgages are begingin to be refused?
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As of this summer, mortgage arrears are at 0.4% in Canada. Definitely not high default territory yet, but nonetheless they're higher than they were 3 years ago. OTOH, they're actually slightly lower or about the same as a decade ago, when this boom started to kick into high gear. Twenty years ago, arrears were at about 0.6 to 0.65%.

http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf

Note that arrears in Ontario are less than the national average. We're sitting at 0.31% in Ontario, as of July.
 
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Riverdale Rink Rat said:
Ending the CMHC is one thing. 'Ending the Bank of Canada's control of interest rates' is flat-out impossible. You need to peg to something -- you can go with gold if you wish -- but you can't just 'not have a currency'. In a modern society, you need to have some form of currency.

I'd also like to see a link to some proof about your claim that Canadian banks have less 'actual liquid capital' as I'm not sure what you mean by that. The Canadian banks claim to be already compliant with Basel III, which is supposed to compare banks apples-to-apples around the world. SocGen is not. (Also, to say that SocGen is compliant with ANYTHING given its whack of Greek debt held at 0% risk is stretching the truth to suit your argument, but you are correct that it's not a 'capital' issue.)

And to say that 'Canadian banks risk-weight' and imply other banks around the world don't risk-weight is also flat-out wrong. They may risk-weight different assets differently, but all banks risk-weight assets -- they must in a fractional reserve banking system.
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Nat Post online has published Mr. Brock's piece verbatim from the The Volunteer. In the comments there, he seems to put the most emphasis on the Debt/Income ratio to prove overvaluation (which I understand) and completely ignores the breathtaking jump from that to his prescriptions (abolish CMHC/Bank of Canada).

Also, I'm still waiting on the link to the 'liquidity ratio of Canucklehead banks are low' proof...
 
Riverdale Rink Rat said:
Nat Post online has published Mr. Brock's piece verbatim from the The Volunteer. In the comments there, he seems to put the most emphasis on the Debt/Income ratio to prove overvaluation (which I understand) and completely ignores the breathtaking jump from that to his prescriptions (abolish CMHC/Bank of Canada).

Also, I'm still waiting on the link to the 'liquidity ratio of Canucklehead banks are low' proof...
Click to expand...

Here you go: http://topforeignstocks.com/wp-content/uploads/2011/08/Canada-Banks-Risk.jpg
 
PinkLucy said:
Or it's a Brad J Lamb promo piece :)
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That too. :)

I read the article again just now and noticed his name figured prominently in it.

Reading the comments on the article it seems all the readers are not buying the story one bit. Hehe.
 
Here's another article: (not sure if i take comfort in the Toronto is #1)

Highrises? We’re tops on the continent
October 05, 2011

Brendan Kennedy


Toronto's skyline is crowded with building cranes these days, with some 132 highrise buildings in various stages of construction.

RENE JOHNSTON/TORONTO STAR Toronto’s condo boom is not slowing down anytime soon as the latest statistics show the city is building more high rises than anywhere else in North America.

The September 2011 data from German research company Emporis — the world’s largest source of information on multi-storey buildings — is included in a presentation to be discussed by the city’s economic development committee on Friday.

There are currently 132 highrise buildings under construction in Toronto, according to the figures. Mexico City ranks a distant second with 88 and New York City is in third with 86. The field drops off dramatically after that: fourth-ranking Chicago is building 17 highrises, while Miami rounds out the top five with 16.

Emporis defines a highrise building as between 35 and 100 metres high, or 12 to 40 floors. Buildings taller than that are considered skyscrapers.

Toronto already has the second-highest number of completed highrises and skyscrapers in North America, with 1,875 — just ahead of Mexico City and Chicago — according to Emporis. They all trail runaway leader New York City by more than 4,000, however.


Provincial and municipal land intensification policies, such as Ontario’s Greenbelt, have led to a shift away from low-rise development in the city, said Matthew Slutsky, founder and president of BuzzBuzzHome, which catalogues new residential projects in Canada.

“If you combine the construction with low-rises, the overall building is about average for Toronto,” he said, calling the growth of high-density development along transit lines a “fantastic” alternative to suburban sprawl.

“What we’re seeing is actually a tale of two housing markets, with low-rise in a substantial decline and highrise in steady increase,” George Carras, president of RealNet Canada Inc., wrote in the Star earlier this year.

Highrise units now make up 60 per cent of new home sales in the GTA, compared with only 25 per cent in 2000, according to Carras.

Emporis’s statistics do not distinguish between residential and office development, so the numbers include more than just condos.

But “you could probably count on your hand” the number of rental highrises and office buildings going up in the city, said Ben Myers, executive vice-president of market research firm Urbanation, which tracks condo development in the city.

There is little fear among industry experts that Toronto construction is outstripping demand, despite Bank of Canada Governor Mark Carney’s warning about a national condo price bubble back in June. In fact, some are worried about the opposite.

There are more than 39,000 condo units under construction in the region, according to Myers — “and 88 per cent of those are already sold.”

A further 118 buildings are in pre-construction, he said, and three-quarters of those are sold. “We’re just continually getting larger and larger and larger.”
 
brockm said:
Here you go: http://topforeignstocks.com/wp-content/uploads/2011/08/Canada-Banks-Risk.jpg
Click to expand...

Mr. Brock: If you meant 'Tangible Common Equity', why didn't you say that? Why the obfuscating/arguably scarier 'actual liquid capital'? Why point out Total Assets/TCE but not compare the RWA/TCE ratios, except to again blur the line to make it look like Canadian banks are doing something borderline ethical that others do not? You could have made two apples-to-apples comparisons, but did not as the second one shows Canadian banks in much better stead. Instead, you make a big deal about an apples-to-oranges comparison you didn't have to make.

I have no issue with your household income/debt argument -- as Shiller has pointed out, Canadians are probably going to take a 20-25% haircut on their house price, particularly in Vancouver and Toronto. Will this affect Canadian banks? Probably, to a certain extent. Will it make them insolvent? Ridiculous.

IMHO, your argument has holes big enough to drive a truck through, when it doesn't need to have them. You've created them yourself in order to make your thesis more dramatic.
 
Latest marketwatch

October MarketWatch is out:

http://torontorealestateboard.com/market_news/release_market_updates/news.htm

September Rounds Out a Strong Third Quarter
Toronto, October 5, 2011 – Greater Toronto REALTORS® reported 7,658
transactions through the TorontoMLS® system in September – a 25 per cent
increase over September 2010. Sales during the first three quarters of 2011
amounted to 70,588, representing a 2.6 per cent increase compared to the first
nine months of 2010.

“We have experienced strong growth in sales so far this year, with a much more
active summer compared to 2010. However, while sales have been strong, we have
continued to experience a shortage of listings, resulting in more competition
between home buyers,†said Toronto Real Estate Board President Richard Silver.
“Over the past few months, the listing situation has started to improve, so we
expect home buyers will have more homes to choose from in the months ahead.â€
With annual growth in sales (+25 per cent) outstripping annual growth in new
listings (+15 per cent) in September, market conditions became tighter and the
average selling price continued to grow by close to 10 per cent on a year-over-year
basis.

“Strong price growth through the first nine months of the year was mitigated to a
great degree by low interest rates and rising incomes,†said the Toronto Real Estate
Board’s Senior Manager of Market Analysis Jason Mercer. “As buyers continue to
take advantage of the affordable home ownership options in the GTA, we remain on
pace for the second best year for sales under the current TREB market area.â .
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Canadians’ household debt raises eyebrows at IMF

The International Monetary Fund isn’t totally convinced that Canadian authorities have a handle on the risks building up in the housing market.

“Developments on the housing front require increased vigilance, and consideration may need to be given to additional prudential measures to prevent a further buildup in household debt,” the Washington-based IMF says in its latest economic outlook for the Western Hemisphere.

By prudential measures, the IMF means steps such as those Finance Minister Jim Flaherty took in January to curb mortgage borrowing, including the reduction of the maximum amortization period to 30 years from 35 years.

The reason for the IMF’s concern is household debt, which is now as bloated in Canada as in notoriously profligate Britain and the United States. The debt of Canadians has inflated along with house prices, which have surged some 30 per cent since their trough in early 2009. As long as house prices remain elevated, that debt looks affordable. If prices slump, then there is a risk that households retrench, robbing the Canadian economy of domestic demand at a time when international demand for exports already is weak.

“Consumption might moderate more than expected from a large retrenchment in highly indebted households amid concerns of a drop in house prices,” the IMF says. “The latter are estimated to be above levels dictated by economic fundamentals in some key provinces.”

The fund calls the Harper government’s plan to gradually eliminate the budget deficit “generally adequate” and advises the Bank of Canada to leave interest rates low so long as inflation remains in check.

But the need for accommodative monetary policy is precisely why authorities must look for other ways to restrain household debt. Businesses will need lower borrowing costs to offset the effects of weaker global demand and a stronger currency. Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse.

Bank of Canada Governor Mark Carney sounded the alarm in a speech in Vancouver in June where he argued persuasively that Canada’s real-estate boom had reached its limits.

For his part, Mr. Flaherty says he’s satisfied he’s done enough to curb the accumulation of mortgage debt.

The finance minister said in New York on Wednesday that he would need to see “clear evidence of a bubble in the housing market in Canada, which we have not seen,” according to a report by Bloomberg News. Mr. Flaherty defined a bubble as “dramatic surges in prices in some part of the country.” He also said the measures he took in January have led to “some softening in the Canadian housing market.”

http://www.theglobeandmail.com/repo...d-debt-raises-eyebrows-at-imf/article2191848/
 
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