Collusion in Canada?

I have a friend who is a CFA. We had an interesting conversation that led me to do some digging. He asked a simple question when we were talking about ABCP and how good a deal some US financial stocks are compared to their Canadian peers: "have you noticed how the banks aren't announcing write downs on the same day?"

I hadn't. But what would it look like if they did?

Today, National Bank Financial, the smallest of the Big 6, announced the biggest write down yet: $575 million. It's stock went up. It holds $2.25 billion worth of worthless paper. I'm guessing the other mortgages haven't reset yet?

Anyway, here's what they all have written down thus far:

NBF: $575 million
CIBC: $463 million
RBC: $360 million
BMO: $275 million
BNS: $190 million
TD: nada

Total: $1.863 billion

Now that barely equals the RBC quarterly profit thanks to yours and mine bank fees, so no sweat right? Wrong. Why do they simultaneously announce profit taking, like, say, selling off Visa and Mastercard assets to mitigate their reported losses? Because investors don't like any losses. Period. They panic. And sell. And panic and sell and panic and sell. You get my meaning.

Things are only just starting to get ugly for our friends down south. Citi, the world's biggest bank is rated by some as a "sell" stock today.

Our banks meanwhile, thanks to an assumed lunch date between bigwigs several weeks ago, decided in their wisdom to announce write downs little-by-little; and that's exactly what they did too, the smallest losses were announced first to numb the greater pain announced today. The situation is not rosy here, no matter what any of the so-called economists would have you believe.

Dodge was in South Africa over the weekend, where he hinted a rate cut would be necessary. This will only fuel the inflation that is already much higher than reported in N.A. 2010 could easily prove to be as disastrous as 1981.

Of course, none of this has anything to do with real estate (sarcasm intended) so carry on people.

October Sales: Need's Analysis

Roger's words:

VREB stats are now out. More positive spin from VREB. Lets take a look at the facts.VREB in italics; Last months numbers in brackets.

• The average price of single family homes sold in October was $556,222 (584,193); the six-month average for single family homes was $570,454 (572,007).
• The median price was considerably lower at $495,000 (520,000).
• The average price of all condominiums sold in October was $343,334 (341,014); the average for the last six months was $321,993 (318,198).
• The median was again lower at $291,000 (288,500).
• The average price of all townhomes sold last month was $407,031 (402,213); the six month average was $404,163 (402,246).
• The median price was $369,950 (375,000).
  
• MLS® sales last month included 375 (335) single family homes, 196 (150) condominiums, 79 (77) townhomes and 22 (21)manufactured homes.
• There were 3,311 (3381) properties listed for sale on the MLS® system at the end of last month, down slightly from the 3,426 properties in the same month a year ago.

Now for the analysis:

1. Sales of homes and other properties in the Greater Victoria area soared 20 percent in October compared to the same month a year ago. There were 708 sales through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) in October, up from the 590 sales in the same month a year ago. There were 632 sales in September of this year. This is true but the tone leads the reader to believe that the market is still hot and rising. What is happening is that more buyers are buying houses at a price that is cheaper than last month!!

2. Meantime, prices for single family homes moderated somewhat while prices for condominiums and townhomes showed little change. Victoria Real Estate Board President, Bev McIvor, says the strong sales and stable prices show continued consumer confidence in the market. McIvor added that it’s normal for overall prices to fluctuate on a month-to-month basis depending on the properties that sell in a given month. “While the average price of single family homes moderated slightly last month, the overall average price so far this year is over seven percent higher than at the end of last year.”

Moderated somewhat - moderated slightly - stable prices !! The statement is true for condos and townhouses but the average price for single family homes dropped by $27,981 (4.8%) and the median by $25,000 (4.8%) in one month!! stable prices show continued consumer confidence in the market. Oh yeah - for those of you registered for real estate PCS you know that there are big price reductions every day and some nice haircuts given out in October. Bears - stay tuned - we are on a roll here. The cold weather and Christmas season are coming up fast. Next month sales will be down, lowballers will be active and the inventory is still high. I can hardly wait for the November and December numbers.

H/T Roger...

UPDATE: I'd just like to add how funny it is in a month that the average and median prices in SFH both dropped 4.8% that VREB decided to compare the average to the 6-month to make it seem less so of a drop. Ah, spin.

This is telling, non?

Castlegar News, Page 0024, 31-Oct-2007

Income Earnings – Where do you Rank?

By Debbie Pereversoff CFP, CSA

Last week, I searched the internet looking for interesting data from the good folks at Statistics Canada regarding retirement savings. I wanted to find out a little bit about income earnings. Specifically, how much money people make out there, and where do we as individuals stack up?

All the data here is for the 2004 calendar year, which is the most recent income data available.

Just prepare to brace yourself; we'll start with “median” total income. The median is the mid-point, where half the included population is higher and half is lower.

“Total income” in this case includes income from employment, investment, government transfers, private pensions, registered retirement savings plans and other income. What I found out was that the median total income for Canadians was…$24,400. If you made more than $24,400 in 2004 – congratulations - you were in the top half of income earners!

Now, before you calculate that fully half of Canadians work for less than $12.20 an hour, bear in mind that “total income” will capture part-time employees, after-school student jobs, etc. Those people will pull down the average with a low income that may not be representative of hardship. That being said, the bottom half of total income earners is also populated by people who are out of the work force and living on low incomes provided by pensions and government benefits.

Many of those people do indeed have financial hardship.

The median employment income for Canadians in 2004 was $25,400 - that's just counting the working folks. The highest median employment income by province was the Northwest Territories by a wide margin ($35,400), followed by the Yukon ($28,300), Ontario ($27,900) and Alberta ($27,500).

Newfoundland was the lowest at $17,000.

But let's move back to total income for Canadians, and climb further up the scale to see where the meat is. Let's move all the way up to where about 2/3rds of individuals have lower incomes. In 2004, you were in the top third of income earners if you made more than…are you ready? - $35,000!

I know what you're saying. Let's go higher! Okay, let's move up to the top quintile line. At this level of income, 80 percent of people made less than you – the number? – 19.8 percent of Canadians with an income made $50,000 or more in 2004!

Now, although a bit over 12 percent of individuals had incomes between $50,000 and $75,000, the atmosphere thins out pretty quickly above that. Only 7.6 percent of people had incomes of $75,000 or more in 2004. Only 3.4 percent made $100,000 or more. And by the time we get to the $150,000 or more category, we're down to just 1.3 percent of income recipients.

People with 2004 incomes of $200,000 or more were a rounding error: only 0.7 percent made $200,000 or more. And you can be 99.5 percent sure that any randomly selected Canadian earned less than $250,000.

OK - those are the stats for individuals. The nice folks at Stats Canada also track the incomes of various family groupings, so we can get an idea of where entire households compare by income. “Couple families” are couples (married or common-law, including same-sex couples) living at the same address, with or without children. No singles or lone parents are included. The median total income from all sources for all members of such families in 2004 was $64,800. Less than a quarter of such households had total incomes of $100,000 or more and just over 8 percent had incomes of $150,000 or greater.

So, there are the stats, and that's what we make. Now, consider some of the implications of this information. If there were folks who made $50,000 a year and didn't feel like they were making enough to get by (and there are), it would be useful for them to consider that based on 2004 figures, 80 percent of Canadians with an income actually make less than that. If their individual income was close to $65,000 – it would be enough to push them into the top ten percent of incomes, received by Canadians.

Ninety percent of the 23.4 million people with an income in Canada made less. If they felt they weren't getting by at an income level that's higher than that of the vast majority of the people, in one of the richest countries in the history of the world, do they have an income problem or is it a problem related to something else, like choices or expectations?

Looking at the statistics of what we all make, it sure gives you something to think about – doesn’t it?

Debbie Pereversoff CFP CSA is a Certified Financial Planner and a Certified Seniors Advisor with her company The Affolter Financial Group Inc. in Castlegar.

Unbiased by me for your reading pleasure. Comment away.

What would it look like if we bought in 5 years; Redux

Condo time. Yes, you did just hear me swallow. I've made no pretenses about my apprehension with condos. To me, you're much better off being a renter than an owner of these types of dwellings. I won't get into those details, rather, I'll get into the analysis.

For this one, we had to go waaaaay back. Check out MLS# 225591. It's an older unit (pre-leaky), it hadn't seen a stitch of work in about 25 years. It was downtown, but not "Central Park" or other less than sunny sides of downtown. We'd only consider a downtown condo. In our hunting experience, they don't hang around long, so we'd look at this as a more liquid purchase than a lot of others we could make in this market.

Original ask was $229,900. It sold for $225K. We'd put 5% down and pay cash for closing costs. We'd also have $10-$15K for "updating" which this particular unit needed in order for us to feel good about the purchase. For full disclosure, we actually made the call to put in an offer on this unit after watching it for 3 weeks, but it had a conditional offer accepted that day. That was March 2007. And we're relieved.

Here's what it looks like for us:

We'd pay bi-weekly rapid. Even with taxes, monthly assessment, and bills, we'd fall well under the recommended 30% of gross income (we'd actually be 30% or less of net) which is just fine. On this purchase, we'd even likely go 5-year closed variable which would save us 0.1%. Not much, but it adds up and we can easily handle a 1%-2% interest rate hike.

So what does this look like 5 years from now? Again, we'll make some assumptions similar to yesterday.

Here's the 6% growth side:

Present value (actual): $225,000.
Future value (assumed): $301,100.
Difference: $76,100.
Mortgage principle paydown: $23,500

Total equity: about $100K.

Wow. I am honestly surprised. My risk is roughly half of what it was yesterday. My equity is only $60K less. That's like a kilometer to a mile really. OK. No it's not. But for barely being a blip on the risk factor side for us, I'd say a $100K equity in 5 years is a pretty good return. Too bad I know people who have hit that mark, with less risk, in less time, in better condos, over the past 3 years, and therefore tainting my expectations and those of everyone around us. But I digress.

Let's look at the downside now. There was some reasonable debate about my assumptions on the period 1994-1999 in town. I'm OK with that. Condo's on VREB aren't counted until 1995. So I have to shift my 5 year period ahead by a year. So we'll use downtown units from 1995-2001.

1995: $152,000.
2001: $145,000.
Difference: $7K or a whopping 5%.

This basically means you lost money. But not that much. You'd even come out ahead with equity on the principle pay down to the tune of almost $16K. If we did the upgrades of $10-$15K we figure we'd get 50 cents on the dollar come sale time (conservative) so we'd probably even break even.

I won't be commentating for a while, we're out condo shopping.

OK. No we're not.

What would happen if the condo market dropped 6% annually?

Present value: $225,000.
Future value: $149,000.
Difference less principle paydown: $52,600.

If it was only a 3% drop over 5 years?

Present value: $225K.
Future value: $186,500.
Difference less principle paydown: $15K.

Maybe we'll wait till we sell the place to do renos? Then we'd be even. Or maybe not.

Again, I've left out the taxes, MA and other expenses. This isn't a who wins the wealth war post. Just a little math playing around analysis for you folks to rip to shreds.

Market Cycles

A regular reader sent me a fantastic article from the early 1990s written by economist Patrick Foley of Lloyd's Bank of London. The article, A market like no other is unavailable online these days, and out of respect for its source, I won't post it here, for reasons of identification. But I'll give you a synopsis of his arguments for your debate/commentary.

Foley's argument is based on the RE market in England back in 1990. At that time, prices were stable, but sales were stagnant. How can this be? As Foley suggests should be the case "the seller would simply reduce the price until buyers were attracted." The RE market is different though, "many sellers would prefer to take their house off the market rather than lower the price."

Maybe we bears should pay closer attention to the number of expired listings happening lately? If we see more listings removed prior to sale, then we know what is happening is similar to what Foley describes. What about the other's though, the ones who must sell? Foley says those indicate the next shift in the cycle.

When that happens, we see a reduction in prices. Who are forced to sell? There are plenty of reasons why someone might be forced to sell, but perhaps the first indicator would be broad reductions in new home prices, especially in completed condo developments with unsold units.

The first sign we'll see is a reduced number of sales. And the number we need to focus on is year-over-year sales, not month-to-month because the market is so seasonal. When the number of sales is reduced, so is the corresponding sales prices, so we must be careful that the weakness in the market isn't over-stated--the same factor exists on the upside, and we see it every time a high priced home sells in Victoria.

What part of the cycle is Victoria in according to Foley? Foley says prices are slower to react. In fact, when volume falls, sometimes prices spike before they begin a decline. But we witness a sharp decline in price inflation. (Considering that inflation is roughly half of what it's been over the past 2-3 years, I'd bet we fit somewhere in this part of the cycle).

What has been the trigger for cycles to end according to Foley? "...the end of the boom for all three of the most recent cycles coincides with a tightening of macroeconomic policy by the government of the day."

Foley's study period had governments raising rates due to exchange rate weakness, rather than domestic demand. Today we see the opposite: the BoC is concerned about domestic inflation, not exchange rate weakness. Foley felt that the previous economic policy would contribute to a deeper than normal trough.

Today's situation is not so black and white. In the US, it's expected that the Fed will reduce rates due to weak economic fundamentals, while their currency takes a hammering on the world market. But in Canada, it's expected that the BoC will have to reign in inflation and potentially drive the $CDN to parity. Both of these could have considerable economic constraining effects.

Based on Foley's example, it isn't clear where this Victoria market sits.