Wednesday, December 23, 2009

Globe and Mail: no need to slow down housing market

I think this one ought to be preserved for posterity. From an editorial in today's G&M:
Housing is undoubtedly still in demand and interest rates are at historical lows, but there is no agreement that there is a bubble in the market. Canada was spared massive exposure to subprime mortgages, and the American experience is helping inform bank prudence north of the border. Meanwhile, Canadians are largely succeeding at keeping up with standard mortgages, despite the economic downturn; their capacity to meet future obligations will only increase once the downturn ends.

Moreover, Canada's regulatory regime is already doing well at keeping Canadians solvent and in their homes. Unlike in the United States, homeowners do not get tax deductions on their mortgage interest payments. The era of the no-money-down mortgage has faded in Canada.

It is certainly true that free-money fueled housing bubbles don't create problems for banks until they pop. But what may be less true is the contention that this one won't pop.

And BTW, why should banks be prudent when they unload the sucker mortgages on the taxpayer through CMHC?

It is stunning that so many people are blind to what is going on--when we have right in front of us in the US a giant example of what happens when you give free money to people to spend on houses. Hint--it doesn't end well.

8 comments:

JimTan said...

Over at RET, we get amazing confession from former bears. One after another. They turned buyers! They couldn't resist 'free money'.

You guys have a Merry Xmas and Happy New Year too!

ReductiMat said...

I wonder who purchased the last Pets.com share? I sure wouldn't want to be that person...

vreaa said...

JimTan doesn't understand that bear capitulation is bearish.

vreaa said...

Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

See:
http://tinyurl.com/y97ex74

Excerpt:
"Factors threatening market health have steadily accumulated, and in our opinion they are approximating a critical mass. A virtuous cycle is about to turn vicious. All evidence suggests that Vancouver Real Estate is heading for a very significant bear market. Unfortunately, conditions have become so distorted that a simple return to normal will have profound and prolonged consequences for our city. The coming housing bust will effect all Vancouverites, and the fallout will not be good. For our city, this RE crash will quite likely be the defining social and economic event of the next decade."

The factors in the drama are summarized at VREAA.

vreaa said...

That's:
http://tinyurl.com/y97ex74

jesse said...

Yeah "free money". Enjoy it while it lasts and don't complain if/when it becomes "less free".

JimTan said...

Lock your rates in!

Economy Poised for Surge as Most Accurate Economist Sees U.S.

Dec. 28 (Bloomberg) -- The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki, the most-accurate forecaster in a Bloomberg News survey.

The world’s largest economy will expand 3.5 percent in 2010, according to Maki, the chief U.S. economist at Barclays Capital Inc. in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best --consume, said Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said.

Household spending “will pick up steam as we move into the second half of 2010,” said Maki, 44, who topped all 60 forecasters in the Bloomberg News ranking of gross domestic product projections for the first three quarters of 2009. “The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate” to an average of 9.6 percent.

Maki, who specialized in researching household finances at the Fed from 1995 to 2000, said the economic recovery this time will be similar to past rebounds. Consumer purchases improved after last year’s 61 percent plunge in gasoline prices and will keep growing in 2010, reflecting the surge in stocks. Faster growth will push Treasury yields higher and help the dollar strengthen as the Fed raises interest rates, he predicts.

Consumer Behavior

Maki holds a doctorate in economics from Stanford University near Palo Alto, California. His dissertation addressed Americans’ response to the phasing out of tax deductions for interest on consumer loans. He received a bachelor’s degree in economics from St. Olaf College in Northfield, Minnesota, and joined the investment banking unit of London-based Barclays in 2005.

“One area that we put more weight on perhaps than others is the stock market,” he said in an interview. The 67 percent gain in the Standard & Poor’s 500 Index since a 12-year low on March 9 has helped shore up family balance sheets, putting Americans in a better position to spend.

The prospects for a stronger rebound are consistent with recoveries from past recessions, he said.

“We don’t believe this time is different from all other business cycles,” said Maki. “The consensus view that growth will stay subdued all through next year -- there’s no parallel to that in modern U.S. history.”

Goldman More Pessimistic

Maki’s forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey this month. He is more optimistic than Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Hatzius, 41, estimates the economy will expand 2.4 percent in 2010, and his 2.5 percent first-quarter growth forecast is half the pace Maki anticipates.

Ed McKelvey, who works with Hatzius, said the Goldman team forecasts “subpar growth” next year because “employers will be reluctant to hire” and households will exhibit “a bias toward higher saving.” Budget difficulties at state and local governments and credit constraints will also restrain the economy, he said.

Maki’s projected 5 percent rate of expansion in the first quarter, the fastest since the same three months in 2006, will reflect the need for companies to replenish inventories cut at a record pace in the first nine months of this year.

ReductiMat said...

Jim, beware the prognosticator!

The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
- June 1930

SCHWAB FORESEES RECORD PROSPERITY;
-October 25, 1930

“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
- June 9, 1931 (Stock market did bottom one year and 50% later)

WORLD COOPERATION: A NEW STEP AHEAD; The Hoover Plan Has Focused Attention on the Problem of Economic Unity THE NEW WORLD COOPERATION
-July 12, 1931