Tuesday, July 31, 2007

SOFT LANDING EXPECTED

Last night, we were at an economic outlook presentation by Craig Alexander, Vice President and Deputy Chief Economist for TD Bank Financial Group, with a specific focus on the local real estate market. I'll attempt to summarize his key points, much of which has more to do with the overall markets in general and really suggests how interconnected real estate and stock markets/economics have become:

REAL ESTATE HIGHLIGHTS
  • expect a 25-month period of increased market volatility caused directly from US sub-prime implosion which won't be over until at least Q4 of 2008
  • Canadian companies with exposure to sub-prime debts will be fine. CIBC may have to write down $100M, in which case, markets will react, CIBC will take a stock price hit, you may want to buy CIBC stock then as you'll get a good deal on a long term hold
  • Victoria RE is not in a bubble, supply/demand ratios are too tight (2.5 months inventory)
  • Edmonton RE is in a bubble, supply/demand ratios are too loose (9 months inventory)
  • The days of flipping RE in Victoria for quick profit are done for foreseeable future
  • RE growth expected as SFH 5% real/7% nominal; condos 4% nominal
  • Revert back to fundamentals of RE investing; now it really is about location
  • Quality of construction is expected to be a significant issue in the next decade, prepare for another "quality crisis"
  • Owning a home is still a good economic choice
GLOBAL STOCK/ECONOMIC OUTLOOK
  • Expect interest rate hikes between 25 and 50 points in 2007 in all G7 countries except US
  • Markets will be volatile due to rising interest rates and moderating corporate profits
  • Canadian productivity is the number one economic issue
  • Central Bank has inflation under control
  • Tight labour markets are keeping supply/demand ratios close in all sectors
  • Chinese market, despite volatility, will continue to outperform all others with exception of India
  • Outside North America and China, German market is most attractive
  • Want to get into China but can't stomach the risk, look to Japan, as they are China's largest exporter
  • Consumer spending is directly related to employment and wage gains (low unemployment/wage inflation)
  • Corporate America are high net savers, recession unlikely
  • Canadian dollar does not have room for increases, expect volatility, look for settling at $0.93 US
  • Upper limits on commodity prices have been reached, volatility for 6-8 months, moderate growth (2-4%) supported by rising global demand
  • Equity returns will moderate and slow profit growth, look for balanced mutual funds to return to 7-8% YOY from 10-12%
Craig spoke to issues that are near and dear to my heart.

On inflation: CPI is really good at counting what it counts. The real issue is that it doesn't count what we spend our money on, and what it does count discounts the fact that products change. Yes you are spending more than 2% on the things you buy. But don't worry because the BoC has long since departed from using the CPI as the main index it uses to set monetary policy.

Local RE: buyer beware. Location, location, location. Diversify, Diversify, Diversify (if all you hold as investments is property, look out).

Stock Market: if you're heavily weighted in commodities/oil & gas, it's time to re-balance your portfolio; look outside North America for long term growth.

13 comments:

Anonymous said...

Interesting.

However, the wild card is new construction. When you look at the inventory to sales ratio for new condominiums. WOW, look out. Here is were the crunch happens. Look for cancelled construction, developers starting to rent recently built complexes with the rents assigned to the lender, and complexes going into receivership.

Increasing unempolyment as those workers that migrated here for construction work return to their homes in rural BC.

Leading to an increase in vacancy rates.

Leading to home loan defaults for those people who bought requiring the income from the now vacant basement suites or have lost their construction related job.

Leading to speculators dumping re-sale homes. Increasing the listing to sales ratio for re-sales. Repeat above scenario for re-sales. And so on, and so on.

For those who have buddies that are realtors ask them to show you how many new condominiums are for sale in Langford and Colwood versus how many have sold in the last month and three months. And how much year over year prices have decreased. (not a typo) I mean decreased.

"Chicken Little"

Anonymous said...

The 'good news' you heard about Victoria's RE is only one man's opinion. It's a crock. I have it from very good sources that listings are the highest in 6 years. Time for a PLUNGE in prices.

If prices don't DEcrease by October, I'll eat my shoes.

Aleks said...

Quality of construction is expected to be a significant issue in the next decade, prepare for another "quality crisis"

This is what I worry about. Not that I particularly want to buy new, but if you do it's a crapshoot. Everything since the original leaky condo crisis is suspect. And a 2-5-10 warranty isn't worth a damn if the problems don't show up for 12 years.

Anonymous said...

The comments were nicely balanced, and not extreme. He forgot to mention, however, that coincident with the sub-prime crash in the US, the general risk assessment method in the US and throughout the world is being re evaluated, and that this is most likely leading to a credit crunch--a massive reduction in liquidity-- and that this alone could drive the US economy into recession.

It seems to me that one of the major questions in the US property market is whether or not the sub-prime problems will spread to the general mortgage market. While it is difficult to say at this point, the fact is that the problems with the sub-primes are just in their initial stages, and we don't even know the full effect of just this small category yet. It seems likely that the general mortgage market will be affected, and depending on how much, a real blowout could occur, which would undoubtedly affect Canada as well.

I cannot predict the future, I wish I could, but neither can he. All the reasoned arguments that either he or I can produce ought to take into account the fact that the property markets both in Canada and the US have gone up largely for unknown, probably emotional reasons, and it would be unreasonable to expect that they will come down in a reasonable measured pace. They might, but it seems unlikely that at some point a crash would not occur, even if unreasonable.

All in all, caution is indicated in the purchase of residential property at this time.

hhv said...

those warranties aren't worth anything if the developer goes bankrupt or if they blame the code and tie it up in court.

on another note: i'm really surprised that Craig made no mention of credit bubble or debt/savings ratios. seems like a monster omission to me.

JMK said...

The warranties are covered by national insurance corporations. I'm not exactly sure what that means though in terms of quality of construction etc. Presumably these companies won't insure a building that doesn't meet some minimum criteria, but I have no idea if that is "good enough".

My understanding is that the savings rate doesn't include asset investments. I think people are much more likely to invest in equities and mutual funds now than they were 20 years ago, and thus the drop in the "savings rate".

HADENOUGH said...

When I told my husband about what Craig said his first comment was - it is a bank that is what they have to say.

He was a VP at a London Bank for many years.

My friend's wife was fired for being honest on radio about some economic thing 10 years ago in Europe. She has a Phd in Economics. They did not like what she said - she was out. Ing Bank I think. She was right.

Anonymous said...

Housing inventory is tight until it isn't. For example, it was fairly tight in Florida in 2005. Tight supply could reflect demand based on fundamentals, or it could reflect demand based on speculative mania. As we've seen down south, inventory levels can rise pretty rapidly when a speculative bubble bursts. Of course, I'm speaking in generalities. It could never ever happen here, because we're different.

hhv said...

"Of course, I'm speaking in generalities. It could never ever happen here, because we're different."

:)

oh please said...

AFAIK Edmonton was hot hot hot until suddenly listings exploded. By his months of supply criterion Edmonton wasn't in a bubble, but it is now. That's nonsense. It was in a bubble before, and it appears the bubble is deflating or popping.

I'm with anon 12:32 - the credit crunch is going to be most interesting to watch. And the idea that we don't have loose lending this side of the border is laughable.

Anonymous said...

Of course we have loose lending. How are all the people managing to afford expensive condos in Vancouver. The salaries are not in line with prices. Many of the people are young.

100% mortgages etc. etc.

Tony Danza said...

I laugh when I hear people say we don't have loose lending like the US. Although anecdotal, in 2002 after graduating from UBC the year before I had $20k saved for a down payment and no school or consumer debts. I approached my bank to see what kind of pre-approval I could get, hoping for around 175k the loan officer told me that I qualified for 325k (8 times my salary at the time)! Unfortunately I wasn't ready for the commitment of ownership and never purchased, a big mistake in hindsight.

I can just imagine how many couples making combined incomes of 40 to 60k have bought into the insane condo market in Vancouver. If consumer spending takes a hit or when construction slows there will be a lot pain for some.

Sam said...

Indeed, as the first commenter said, construction is the big story here. I was out of the country the last 4 years, and whenever I asked people back here in BC what this supposed "boom" was (since to me BC looked as hokey as ever from an economic perspective), they invariably said it was a construction boom. So when it ends, as in the US, look out below. The US is still building apace, in this famous Nash equilibrium for builders, but this is making the situation worse and its eventual collapse will be more painful as a result. Look for the same thing to happen in Van/Vic with new construction.