Some meltdown

Douglas Porter, chief economist with BMO Capital Markets, said evidence  continues to mount that the Canadian housing market seems to have pulled off the  fabled soft landing.

He said surprises on the sales data in recent months have consistently been  on the high side of expectations, not the low side.

“While some are highlighting the fact that prices are now rising at ‘their  slowest pace since the 2009 recession’ the plain facts are that: a) they are  still rising, and b) faster than inflation, and c) prices are at all-time highs.  Some meltdown,” he said

Read more in the Herald:  Calgary a bright light among Canadian housing markets.

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11 responses to “Some meltdown

  1. Soft landing usually refers to a bottom in prices. This is anything but a soft landing as prices continue to fall across the country. Once the stock market crashes in America and the long bear market in stocks resumes then we’ll see the bottom fall out of Canadian real estate.

    …and here’s the other side of the story. “According to the 2013-2017 Suburban Residential Growth report, the population of Calgary is expected to grow by almost 120,000 people over the next five years…”
    http://www.huffingtonpost.ca/2013/05/15/calgary-boom-population-suburbs_n_3281190.html?ncid=edlinkusaolp00000003 -Bob

  2. Tony, what base is stock market crash? US corp balance sheet are very strong, US RE just came out its prolong bear market, North American energy landscapes are CHANGING. Enbridge along is going to complete 20 projects in the next 2 years, lots in US. Looking at CP and CNR stock price, that tells us something. In the mid of 90’s, “AB is going to bankrupt ” was heard and read in the media everywhere. We now know AB has not bankrupted so far. I think stock market is telling us US is going to do well, at least ok. SPX outperformed TSX last yr and this yr by wide margin. This tells me China is going to have a slow growth, but crash. Unless Fed raises rate very soon and dramatically, however bond market did not tell me it is happening. In Calgary, the buyers of $1m+ properties are 35-40 yrs and 90% are local. Many are business owners. They know what’s going on. I’d agree Van RE price is craze and has been so for too long. Finally I feel that Asian people in general much favor RE over stocks ( look at Hong Kong and Singapore ), it may be one of the reasons why Van House price stays where it is.

    • Howe, on the US stock market there is very little top line revenue growth. Earnings per share increases of 4 to 6%, which analysts are estimating at $107/share for 2013 are coming off major cost cutting and share buybacks. Capital investment in business is fairly anemic, I do agree that I don’t really see a catalyst for a stock crash as there is no good alternative versus blue chip dividend payers, bonds are a death trap. It doesn’t mean things are so well, stock market has never been a proxy for the economy. Walmart, Proctor & Gamble, Safeway, IBM, AT&T & Starbucks have just had yoy sales decreases, recent macro data in the US and Canada point to deflation more than inflation. A current P/E of 17 on the stock market is not historical cheap, its a liquidity drive to yield, 5 percent earnings growth with little top line growth is not growth. Margin levels at the NYSE are at levels not seen since 2008. The Fed is succeeding, they are forcing people to risks assets. Is there a reversion to the mean, likely, when…who knows.
      Ask these 35 to 40 year old Calgarian’s how much money are they putting down on those million dollar homes they have been buying, very little, everyone knows cash is hard to come by. 35 and 40 year amortizations and loose lending practices enable them, they are by and large overlevered. Any shock to credit or the economy will be drastic and affect Calgarians just as hard as others…its not different here. We will have our catalyst for a Calgary real estate correction, what it is and when is guessing. The government has reduced demand through new CMHC rules, lending standards are tougher, the stage is set and there will be no loosening, credit will be harder to come by not easier, interest rates will only move higher, we should ask ourselves what is the catalyst to take home prices higher? Remember each year your home price stays the same people are loosing value.

  3. Dan, 490 of the 500 SPX companies have reported Q4/2012 with yr over yr earning growth 6.1% and revenue growth 3.6%, both much better than expected. The forward 4 quarter E estimate for SPX is about 112 that P/E on forward E is about 15. This translates the earnings yield 6.7%, compared with Fed funds rate 0.25%. I totally agree with you about Fed forcing people into risky assets. Since US gov made a fatal mistake – let LEH go under in 2008, I strongly doubt Fed is going to reverse its QE w/o economy on solid footing. At the same time, US gov is going to, or at least trying to, repair its balance sheet. 2 major positive fronts in US are the house recovery and energy independency in the future. This will take a long time, with many bumpies on the way.
    My personal experience with those 35-40 yrs buying $1m+ houses is that the buyers both are professionals, doctors, lawyers, engineers working in the oil/gas sector. They put down at least 25%, only one family put down 5% citing they can get better return somewhere else. With family gross income more than $200k ( more if adding yr end bonus)and net family income more than $130k, they can get mortgage w/o difficulties. A friend of mine who is mortgage broker dealing with many clients purchasing $1m+ houses. He said the younger the buyer, the less the downpayment, Usually they put down 25%. Older clients put down 40 – 60 %, some just have $100k mortgate. During early 2000 when Calgary SFH price is around $250k, many people, including media, are starting bubble talk. The fact is that even during the 2008 worst financial crisis in history, Calgary SFH average price never went back to $250k mark. What is the catalyst to take home price lower? Net migration into Calgary? Higher labour and material cost to build a new house? Higher land price every time when developer come out with new phase? Graduately closing price gap between Western Canada Select and WTI after 5 – 6 years when both rail and pipeline shipment solve the bottleneck? Calgary just came out its house bear market from aug 2007 to 2011, the chance of housing double dip in the next year or two is small. Last, when skepitical, doubt and fear are widespead, that tells the market is not frothy. Exception would be Hong Kong and Singapore RE.

    • Howe,
      2013 S&P earnings consensus is $110.97; gives us a forward P/E of 15; not relatively cheap but yes better than bonds.

      Q1 S&P earnings estimates increased 5.1% – 40% of that increase is due to stock buybacks. For example Home Depot is buying 17 billion in stock, earnings per share increasing due in part to a lot less shares.

      Q1 Revenue growth of the S&P 500 companies was 0.0%; that is terrible, no end demand and hasnt been much since the financial crisis. Cost cutting and buybacks are improving earnings, yes corporate balance sheets are pristine.

      When you see no marked increase in your business demand and are not confident in investing in your business because you dont see a return that on that capital you buy back shares and cut fat.

      Now 5.1% earnings growth (40% due to buybacks) and no top line growth does make a P/E of 15 expensive, yes better than bonds. Its a very crowded trade due to terrible bonds yields. Those bond yields are artificially low due to FED intervention. Can the S&P go higher – of course. They are blowing the next bubble, with such a crowded trade, high margin debt and other leveraged products the down draft will be swift, you wont get a letter a week ahead that its going to happen. A 20% drop in overinflated consumer staples and utility stocks is 6 years of dividends, people will understand why there are still people buying 30 year treasuries that yield 2.75%.

      House prices do not continue to go higher when rules are tightened and standards are raised. House prices go higher in inflationary environments where wages are rising higher than inflation. A person with $50,000.00 cash making $80,000.00 per year can afford much less house today than they could 1 year ago. That will bring down home prices, the same way they went up by reducing down payments and extending amortization periods. Tighter lending rules reduce the number of qualified borrowers, lower demand equals lower prices.

      There is no real catalyst right now for lower home prices in a place like Calgary for some of the reasons you mentioned, migration economy etc. Most Canadians are overleveraged, mortgages too high, LOC etc.. When we have our shock Calgary will not be spared, reversion to mean will occur.

      Most of those people you mention putting down 25% can’t pay off their home, they are not cash rich, they are house poor, keeping up with the jones. You cant pay bills with the fancy house, when you have to sell them you realize just how illiquid they really are. 2 in 10 are foolhardy, those people will ruin or destroy the equity in the 8 of 10 that are prudent.

      I own my own business in the oil and gas services sector. What I see happening didn’t even happen here in the early eighties, this is very frothy, people are very complacent, very entitled, many live cheque to cheque, when they lose a job or quit there is always another opportunity. Many people own condos that without yearly 5% to 10% increases in value are not cash flow positive, where a 15% correction would wipe there personal balance sheet out. Froth and easy money makes everyone feel like a winner.

      Can home prices go a bit higher in Calgary, maybe. Will they crash here without a catalyst (commodity price drop, higher interest rates etc.) no. A slow melt down is more likely in the short term, lower sales and slightly lower prices.

      The higher things go and the faster, the harder they fall.

      I love the debate, I think we see things the same way but perhaps for different reasons, but it I don’t believe we are any different here.

  4. Howe, the 2008 crash didn’t destroy us because Flaherty revived it with 40 year mortgages to anyone with a pulse and emergency level interest rates. Had the government stayed away we would have had a much bigger correction.
    Of course the Cons are now reversing all these changes, but the one catalyst left is the interest rates. If (when) they move up things will get ugly. People are tapped out.

  5. YYC_watch: 40 yr mortgage was introduced in later 2007 and ended in Oct 2008 right after US gov made the fatal decision of letting Lehman Brother go under. Cdn gov variouse stimulas, Cdn bank’s conservative balance sheet, China 4 trillion yuan stimulas (creating demand for our resources), Fed and US gov pumping $$$ were the reasons to put the floor on our market.

  6. Dan, can you show me the web link about SPX 0% revenue growth and other data? As you can see my previouse reply said otherwise. SPX current/next EPS is 110.8/121.5. SPX current Est. P/E is 14.90. 12 month S&P P/E range is 12.1-14.9. 10 yr yield 1.88%. 12 mth 10 yr bond forecast 1.5-2.5%. Current Fed funds target 0.25%. 12 mth Fed funds forecast 0-1%. Junk bonds yield less than 5%. As a result, stocks are the better alternative as S&P 500 yield as much or more than most bond funds.

    The wealth destruction wrought by 2008 financial crisis and prolonged RE bear market extended far beyond the plunging shares price into the society and individual, myself included. That SPX reached historic high week after week are met with palpable disbrief.

    I see the standard living is going to be gradual lower over time. $1 today worth more than $1 in the future. This is how Fed repairs its balance sheet.

    So I want to ask you, as a investor, what can he do? Be a chicken little hiding cash under the mattress? or invest in stock market? or invest in RE? or in bonds? or?

    Also I want to ask you why average house price of Vancouver, Toronto and Montreal passed their 2007 high by some margin while Calgary’s isn’t (except SFH)? Why we see luxury houses sale in Calgary reached historic high in 2012 and continue does well in 2013? 1st time home buyers are strong too. What does Calgary face from US shale oil and gas longer term? Do the companies we invest have sound strategies and business models about E & div growth? Why riches become richer and poors get poorer? Be a chicken little, be fearful, doing nothing and not doing solid homework will not do anyone good. We need to learn and be prepared how to do well in any circumstance.

    • Howe, I get my running tally from the fund I invest with. I found this one online:
      http://www.trpropresearch.com/pdf/This_Week_In_Earnings.pdf/
      This one is dated May 10, 2013, Thomson Reuters Research

      On page 5 they show earnings growth for Q1 at 5.3% year over year. Break out Financials and all the other sectors of the S&P 500 grew earnings at 1.9% year over year, or 3.7 Billion on 197.0 Billion. Congrats Bernanke its working, the banks are recapitalizing – also have a good look at financials press releases – cost cutting is furious, head counts are being reduced drastically. There is a great note on how cost cutting is still working.

      On Page 6 is a summary of Revenue, its shows a 0.5 billion decrease in revenue in q1 year over year, rounded to 0.0%

      I am in the market, there is no other place to be. I say its a crowded trade that will end violently some time, you seem to be cheerleading the stock market and claiming it is cheap, it is not.

      I am not in bonds, though people will see on day why some people still are. If we are Japan, and the recent low inflation data would suggest the QE is not really working then perhaps bond yields on the 10 year of 1.7 might be great buys because they could go to 0.5 like the Japanese – that would be great capital growth on your bonds. I prefer to use corporate bond ETF’s and some preferred share ETF’s for the income side of my portfolio right now. Volatility is very low, that signals complacency which is never good – on the bright side insurance is cheap, I have some puts to hedge with. The market could go higher, there are less and less shares and few places to be, sellers have no place to go so why sell, that creates unhealthy parabolic moves in stocks.

      I am into capital preservation, anyone saying you have to be in the stock market to get growth is reaching, inflation is barely 1.5% recent indicators are pointing to deflation, there are several ways to maintain your wealth given low inflation.

      Macro data and credit has also decoupled from the stock market in late 2012. Everyone is cheering the housing rebound in the US, it is also artificial, hedge funds like Blackrock have been buying the homes – I think their tally is 6.0 billion in single family homes, there are several of them doing this. It is helping the inventory but is artificial demand. Rates are being artificially held down and major hedge funds are buying everything in sight in a search for yield – is anyone surprised housing has had a bounce in the USA?

      Estimates will be taken down, they are just repositioning before they do so. A great tailwind for earnings in 2011 and 2012 was a weak USD, earnings from the multi nationals were converted favourably due to exchange. Have a look at the USD lately? King dollar is making a comeback up 14% over the levels in 2011 and up 5% from January – this will have a huge affect on earnings of the big multi national S&P 500 companies that do 25 to 50% of their business overseas. Bernanke will be most worried about the currency war right now because the US is losing, the real reason for all the printing is to kill the value of your dollar so your exports look more attractive around the world.

  7. Take a look at the Shane site.

    Many communities have no lots available. Communities like Valley Ridge have lots priced between $400 – $600. Just for the lot. And Calbridge in Evanston has a lot for $437k.

    Yes, there is still affordable land in Airdrie and in the NE, but it does make you wonder what prices will be like in Keystone. Remember, a lack of land was a catalyst in 2006.

    Look out.

  8. Do you mean “Keystone” as TransCanada’s Keystone pipeline project? If approved, it certainly is a very big confidence boost. Calgary based energy companies will have higher earnings. This translates into higher share prices. Some research papers indicated that there are $20b loss per yr on the table as of the discounted WCS via WTI.

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