Your home: hot or not?

Financial Post Published: Saturday, November 22, 2008

Can your home weather the financial storm? Don R. Campbell, a real estate analyst and author of Real Estate Investing in Canada, gives a dozen ways to analyze your property's exposure to a downturn.

First, it's vital to remember that property markets are not national; they are regional, local and even vary widely from neighbourhood to neighbourhood in the same city.

That being said, there will always be hot real estate markets and others that are cold, but national and provincial figures are too generalized to be used by Canadian homeowners and investors to make sound decisions on their most important asset.

The 12 questions below will help you decide if your area and personal property are poised to go up, stay flat or collapse.

The more "yes" answers you get, the better the market will perform.

But overall, to dramatically reduce your risk, the most important thing to remember is: Don't fall in love with your property.

12 ESSENTIAL QUESTIONS

1 Is your area's average income increasing faster than the provincial average?

2 Is your area's population growing faster than the provincial average?

3 Is your area creating jobs faster than the provincial average?

4 Does your area have more than one major employer? 5 Is real estate booming in the surrounding region more than where you're looking?

6 Will the property values benefit from a major new development nearby?

7 Has the local and provincial political leadership created a growth atmosphere?

8 Is the region's economic development office helpful and proactive?

9 Is the neighbourhood located in an area of renewal or gentrification?

10 Is there a major transportation improvement occurring nearby?

11 Is the area attractive to Baby Boomers?

12 Is there a short-term perceived problem (negative stories, short-term layoffs) that will disappear?

In fact, there are 13 major influences on the long-term value of property. Underlying the local analysis of your property market you need to consider the outlook for Canada generally.

The Canadian economy and real estate are relatively well-positioned to withstand the economic storms that are buffeting property values in many other countries.

Ottawa boosts effort to fight spreading global credit crisis

RICHARD BLACKWELL AND HEATHER SCOFFIELD Globe and Mail Update

TORONTO — Ottawa has announced three new aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday in Toronto the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending.

At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks, in one-month money, through a new Canadian-dollar term lending facility it is setting up.

“Canada has stepped up to the plate in a major way this morning, announcing three major new actions today, all designed to crack the nute that is the credit crunch,” commented Eric Lascelles, chief economic strategist at TD Securities.

Ottawa “has introduced programs that should contribute to a notable narrowing in financial institution credit spreads, and possibly in credit spreads overall,” he said in a note to clients.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion.

He told reporters he made the move because he now expects an “extended period of stress in global credit markets.”

In addition to increasing the amount of money available to buy mortgage debt, the Department of Finance also slashed the price it will charge banks for guaranteeing their loans.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

In Ottawa, the Bank of Canada said it will put an additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

“By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.”

Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer-term funding,” Mr. Flaherty said in a statement. “This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy. In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer.”

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor Mark Carney said in an interview Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.

Canadian banks may not need gov't aid:

TD Reuters, November12, 2008

Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday.

While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to $75 billion from $25 billion -- the federal government is actually making money on that program, TD Bank president and chief executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages that a government agency has already guaranteed, he said.

Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said.

Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said.

TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfil its business objectives, he said.

The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said.

But TD, Canada's second largest bank, would consider U.S. acquisitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said.

He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.

Home construction beats expectations, while prices rise

Jamie Sturgeon, Financial Post

Canada's housing market showed some resiliency through September and October, as national new home prices unexpectedly rose two months ago while the rate of construction on new homes was higher-than-expected in October, a pair of reports said Monday.

Statistics Canada reported that new-home prices rose in September even as the year-over-year increase fell to its slowest pace since 2000.

New home prices gained 0.1% between August and September, StatsCan said. Year-over-year, home prices appreciated 2.1% -- the slowest pace in more than eight years, and down from August's 2.3% rise.

The results were better than expected though, as economists predicted new home prices would decline 0.1% in September, according to the median of 14 responses in a Bloomberg survey.

Meanwhile, construction on new homes remained above 200,000 starts in October, Canada Mortgage Housing Corp. said Monday, defying expectations among most industry watchers calling for a protracted slowdown.

The seasonally adjusted annual rate of housing starts declined 3.1% to 211,800 units in the month, down from 218,600 in September, but still well above the consensus view among economists that predicted between 195,000 and 200,000 new homes annualized.

"This is in stark contrast to the [United States] where over the first nine months of this year, starts are down 29.8% compared to year-ago levels," wrote Paul Ferley, assistant chief economist at Royal Bank of Canada in a morning note to clients.

"Housing starts remained strong in October and are consistent with our new home construction forecast for [the year]," said Bob Dugan, chief economist at the agency.

Single-detached starts in urban areas declined 1.1%, while construction on urban multi-family dwellings such as condominiums and townhouses fell by 6%, CMHC said.

By province, urban starts decreased in British Columbia, the Prairies and Ontario, CMHC said. In contrast, starts leapt 41,300 in Quebec, while builders began construction on 9,600 units in the Atlantic provinces.

Starts on detached urban housing declined in every province except Ontario, where construction increased 10%, the agency said.

It is the second month in a row that CMHC figures have come in widely-better-than expected.

October's numbers are in line with the 212,000 annualized rate the agency forecast for this year.

However, last month's pullback from September may also indicate the country's housing market has begun to downshift toward CMHC's projection of 178,000 starts for 2009, a more constant rate, historically.

"For the first 10 months of 2008, actual starts in rural and urban areas combined were down an estimated 1.6% compared to the same period last year," the agency said.

"The current tight credit conditions are expected to put further downward pressure on new construction through next year," RBC's Mr. Ferley added.

Flaherty eyes measures to ease credit flow

Paul Vieira, Financial Post Sat Nov 8,08

SAO PAULO -- The Finance Minister, Jim Flaherty, acknowledged Saturday that funding pressures remain in Canada, with banks reluctant to lend to certain ailing sectors, and is in talks about undertaking further measures aimed at easing the flow of credit.

"There are credit constraints in the Canadian economy, and naturally the banks are concerned extending credit in certain sectors in the Canadian economy, because of their concerns about the viability of their customers," said Mr. Flaherty in Sao Paulo, where he is attending a meeting of Group of 20 finance and central bank officials.

He said that Department of Finance officials have spoken with the federal banking regulator and the chartered banks about the credit tightness. "I can look at additional measures that we could take."

Nancy Hughes Anthony, president of the Canadian Bankers Association, said the Minister was right to acknowledge that funding pressures exist in Canada.

"While banks are open for business and are active in providing credit, we are all working hard to ensure that our banks and financial sector remain strong while at the same time meet the credit needs of businesses that are having a tough time because of the economic downturn," she said Saturday.

It is one of the first acknowledgments from Mr. Flaherty that measures taken to date, by Finance and the Bank of Canada, are not entirely having their desired effect.

The central bank has made nearly $27-billion available to financial markets, and expanded both the type of collateral it will accept and the number of market players that can access its cash. Meanwhile, the federal government has pledged to acquire at least $25-billion of bank mortgages and has offered to backstop interbank lending through a temporary insurance scheme.

This past week, a coalition of manufacturers called on Ottawa to issue a temporary guarantee on loans and lines of credits because credityworthy producers of goods remain unable to access cash. Also, Canada's top bank and insurance executives have urged Ottawa to take fresh steps to ease funding pressures, mainly by cutting the price for banks to participate in the government-backed insurance program.

The fee to access the insurance on wholesale debt was set at 1.6%, which financial institutions must pay to get the government's guarantee. This was Ottawa's response to moves by other governments, most notably the United States, to issue guarantees on lending, and ensure that Canadian banks were not put a competitive disadvantage compared to their peers.

One of the potential outcomes of this weekend's G20 meeting is a co-ordinated response by industrialized and emerging economies to take measures that would mitigate further economic damage to countries as a result of the U.S.-originated credit crunch.

Canada may skirt recession: IMF

Julian Beltrame The Canadian Press

Evidence was mounting yesterday that Canada may be following the rest of the world on the path to recession, even as global policy-makers look to new measures to combat the economy-destroying financial crisis.

In its latest update, the International Monetary Fund sharply downgrades the economic outlook for Canada and the rest of the world from its previous projection a month ago.

The world organization, headquartered in Washington, said Canada's economy will avoid recession by the slightest of margins with 0.3 per cent growth next year, while all other G7 leading industrial counties will see their economies actually contract, led by Germany and the U.S.

The IMF's latest forecast for Canada is well down from the relatively robust 1.2 per cent advance it had predicted only last month.

"Prospects for global growth have deteriorated over the past month,'' the body said, urging governments to act to stimulate their economies.

The darkening outlook shook markets around the world, with stocks plunging the Tokyo index more than six per cent, while shares fell 3.3 per cent in Toronto and 4.8 per cent in New York's main exchange.

Yesterday brought more indications that the economy in Canada is slowing sharply.

An official government report showed bankruptcies in Canada were climbing steeply even before the worst of the financial crisis hit, increasing by almost 19 per cent in September from the previous month and 28 per cent from a year ago.

And in an indication that Canada's housing slump is deepening, permits for new housing fell 4.9 per cent during September, the second straight monthly decrease and sixth during the year.

Overall, building permits rose 13.4 per cent in September largely on the strength of publicly financed non-residential construction.

Worse news is expected to come this morning with the new employment report from Statistics Canada.

Many economists believe the October jobs number will usher in an uncomfortable period of monthly job losses that will begin to track what is occurring in the U.S., which has already shed 760,000 jobs this year.

"The worst part for the economy is largely still ahead of us,'' said Derek Holt, vice-president of economics with Scotia Capital.

"The speed at which things are deteriorating is alarming.''