Garth Turner is at it again…but this time I have to admit he is not so doom and gloom as he has been.  In his latest post he has made some predictions as to how much the value of Real Estate will go down in certain cities in Canada.  For Calgary he predicts a 15% drop.

So the first question I will get is whether I agree?  Well I have to admit that I do think we may see more of a drop, particularly in the first half then what I have recently suggested, but overall year over year it should not approach 15%. Why?  Well for the answer we need to analyze why and how real estate drops in the first place?  You got it…Supply and demand.Garth and his readers suggest that we will have a significant increase in supply in late February and March to “take advantage of a spring market”  On this unfortunately I agree with him.

The problem he suggests is that the market will not be there for those sellers, and once again I tend to agree with him, but not to the same extent.  The market will be soft but it will not be non-existent.  Let’s look at it another way, in order for the average price to drop you need to have sales! I believe there will still be a segment of the population that will come on and “want” to sell, not “need” to sell and therefore once they see how low they will have to sell their house for, they will either not even bother entering the market (this will be a good thing) or they will exit the market within 90 days once reality sets in.I simply believe there is not as many people in 2009 who will NEED to sell as there was in 2008.

In 2008 we largely dealt with speculators who bought investment homes and condos for flipping.  Those people who did not sell in 2008 will either be back or they succumbed to renting, or others did eventually sell, either way there is less of them that will be back in 2009 to try again.  Finally when those people do come back presumably they now have the reality on what they need to price their home at to sell, and will then sell it.Housing starts are down significantly from 2007 to 2008 so simply put there will be less people in the market.On the other side of the coin I believe there is plenty of pent up demand in Calgary as the underlying economy is still ok, yes even at sub $30 oil.  The media will be playing up the story that there are great deals out there and those buyers will finally jump in by late spring and summer, and they will get good value and the sky will not fall.The length of time when we reach a balanced market is entirely dependent on how much inventory we see come on the market in February and March.  keep your fingers crossed…and if you have friends who are going to list their home to see if they can sell for a huge gain, tell them to stay away from the market, they will only hurt themselves and others.

Interesting article written by the President of the Canadian Bankers Association where she is trying to dispel some myths about the Canadian banking system and deflect some of the recent criticism her members are receiving lately. Myth 1: Banks are not lendingShe says bank lending to business increased by 13.4%  in the 12 month period November to November.  My immediate suspicion is that some of this increase may have happened in the the first four to six months of this time period.  What is more relevant ion my opinion to dispel this myth is what are the numbers in the past 6 months?“All the evidence shows that bank lending continues to increase and banks are stepping in to provide credit to consumers and businesses that have seen their access to other sources of funding reduced.”Pretty vague if you ask me?  Myth 2: Banks are making it more difficult for credit worthy customers to get loans“Banks have not changed the criteria that they use to decide whether or not to provide loans. If you are a credit-worthy individual or business, Canada’s banks are open for business.”That is such a load of crap I can’t believe it.  I suppose it serves her well to have people believe this but is clearly not true.  Ask the small businessman who can’t get a renewal on his line of credit he has had for 10 years?  Ask the self employed plumber who has been in business for 15 years and has excellent credit who can’t get a mortgage approved for 5 or even 10% down?I can tell you from being in the wholesale mortgage industry for over 15 years that the current lending environment has receded at least 5 years or maybe more in innovation and access to credit.  I get that many people think some of this was necessary because mortgage credit was becoming too easy…Ok, but then don’t try and tell us that underwriting criteria has not changed because it CLEARLY has!Myth #3: Banks should match Bank of Canada Interest rate cutsShe of course outlines what many of us now know that the Bank of Canada rate is only one source for banks to lend money and that other sources for money has increased the cost of funds so they can not necessarily match the Bank of Canada rates.  No problem Mr. Carney is smarter then them.  His last rate drop of .75% (predicted by me on this blog) was really only that severe because he knew the banks would not match him.  He really only needed or wanted them to go down by .50%, which they did.  Mission accomplished.  he knew that if he went down by .50% they would have only came down .25%.Based on this theory I suspect that he will drop rates again by .75% at the end of January.I hate when people who so clearly have a hidden agenda are able to write in the papers and be so one sided in their editorial.  Some things she says are likely true but have some perspective and show all sides to the argument…that is how you gain credibility 

The Bank of Canada governor spoke yesterday at a luncheon in Toronto and basically was telling people that this mess will end.  Thanks Mark.  Of course we know it will end, but everyone wants to know when?

When is largely irrelevant in my opinion.  Admittedly no one really knows when it will end anyway, so why waste so much time trying to figure that out?  Isn’t it enough to know that it will end? Recessions are largely exacerbated by the overall psyche of the people.  People get overly scared so they pull back which makes the recession worse.  If we all believed it would end,  and let’s say relatively soon (say by the end of 2009) then we could feel safe to buy the things we want?  Celebrate and enjoy the low inflation and cheap energy right now, what about the low price of housing and corresponding low interest rates…these will end to.  So, what to do then?  If you are not worried about your job and you have control of your debt load, then act normal.  Take advantage of the lower prices and rejoice.  Buy those big ticket items you have been waiting for, but bottom line don’t retreat, you are contributing to the delay of the recovery.If you are worried about your job then act pro actively.  Renegotiate your debt NOW.  With variable interest rates hovering around 4% does it not make sense to shift your debt on your balance sheet from credit cards at 18% and lines of credit at 7% or so and move it into a home equity loan at 4%.  The resulting cash flow savings will serve you well IF you lose your job.  Do this BEFORE you lose your job…how many banks do you think will renegotiate your debt when you don’t have a job?If you are concerned about your overall debt load then read the above paragraph again…slowly.  This applies to you.

If you feel that your debt is control, and your job is safe but you are anxious about your retirement savings and you wonder how you can take advantage of the stock market recovery. Get ready NOW.  send me a line and would be happy to show you some great strategies to re-organize your balance sheet to be prepared for entering the stock market STRATEGICALLY.Don’t worry, be Happy

Many economists and lay people ask if interest rates go to zero what else can the banks do.  Or to say it differently will what they are doing work?  Keep in mind that “normally” central bank actions with respect to interest rates take up to 18 months to take full effect.However these are not “normal” times as we of course know, and the banks’ actions have been more drastic then in normal times still it is a good question, what happens when the interest rates are at zero and therefore we do not have that tool available anymore?  Here are the options

1.  Central banks will keep interest rates low for a sustained period of time to allow the rate decreases to take a firm hold on the economy, therefore look for the interest rates to be very low throughout 2009.  This a revised forecast for me as I had previously been saying that we could see inflation and therefore higher interest rates by the fourth quarter of 2009, I am now pushing that back…it will still happen but look for that in 2010.
2. Governments around the globe will have unprecedented stimulus packages coming soon.  The Obama years are starting right away and he will come in with a bang, count on it.  Harper needs to stimulate the economy to be sure, but he also needs to save his government look for a big package from him.
3. Central banks will switch to the other tools they have.  Purchasing large quantities of debt and mortgage backed securities to inject capital into the housing market to stimulate more mortgage lending to help consumers buy a home.  I might as well take another club at this dead horse, but 2009 will be an EXCELLENT time to buy a house, prices are down and mortgage rates will be DOWN.
4. Central banks could buy long term bonds to keep long term interest rates down as well.  As this develops it will bring even more relief to homeowners getting new mortgages or those people who are renewing their mortgages next year.

They have tools left and let’s watch as they use them to see what will happen, I’ll keep you posted

The Conference Board of Canada has waded in to the discussion about what the government should be doing regarding the economy. As central banks lose one of their most important bullets, the central bank interest rates, due to the fact that these rates are approaching zero percent, many thinkers are calling for governments around the world to jump in and provide some stimulus.In Canada’s case we are fortunate that our balance sheet can handle it.  Many people will call for the heads of the government for taking us into a deficit, but trust me we need to do it.  Brace yourself this deficit could go to $20 billion in order to accomplish what we need.  Keep in mind we have had a good ride and if the government does not help the recvery will be longer and more painful then having a deficit would be. 

There will continue to be a public relations campaign by the big banks to justify why they do not match the rate cuts of the Bank of Canada.  The government (Finance minister Jim Flaherty) has certainly waded in by saying we have “an open, competitive banking system” and the federal government “does not dictate business decisions” It is true that the overnight rate dictated by the Bank of Canada is only one of many sources of funds for the big banks and as such does not accurately reflect their overall cost of funds, but given the current mood of Canadians especially in Ontario you would think the banks would work with their customers and give some overall relief, after all collectively the top 3 banks made $10 billion in profits.keep an eye on this as it develops 

Many people feared that when the Bank of Canada dropped interest rates by .75% that the big banks may not follow suit.  I have to admit I didn’t see this.  I thought that the Bank of Canada had unprecedented power over the retail banks due to the current credit tightening and liquidity pressures.  I figured that the retail banks would not want to poke their finger in daddies eye?Anyway it happened they did not match the banks rate drop fully, only dropping .50%.  So now what?  Well the banks say openly that they would rather keep some of the drop for shareholders and not pass on to customers.  My feeling is that if they continue to do this the Bank will get annoyed.  There will be continued pressure put on through the press I predict, and finally the Bank will drop rates even more then they planned so that when the retail banks only come down a little bit they will be at the level that Bank wanted anyway?  Something to watch for I think. 

Let me start by saying that I am not by any stretch suggesting we are coming out the other side, but none the less it is a good day today, why:

1.  The S&P is up 450 points yesterday
2. The Dow was up 290 points
3. US President-elect Barack Obama has pledged the largest infrastructure package in over 50 years…this is very significant and could speed up a recovery
4. Oil rebounded almost $3 a barrel
5. CDN dollar up 1 cent
6. TED spread dropped 1% (this shows signs of credit crunch easing…albeit we still have a ways to go)
7. Bank of Canada dropped the bank rate by .75% as I predicted
8. Stephan Dion stepped down yesterday, word is Michael Ignatieff will be the interim Liberal leader.  This is significant because Ignatieff has not been a supporter of the coalition of idiots, and has already started to say that if Harper brings a budget he can support, he will.  This also means that Harper will bring a powerful budget for our economy.

Have a great day everyone

Despite what many people will talk about at the coffee shops or hockey rinks the housing market in 2009 will be stable.  We do expect a slower start to the market that will keep activity low but by the latter half od the year we will see more steam come back into the market.Buyers are out there and the deals are getting better, eventually they need to surface.  In fact I believe especially in Calgary that we could see a resurgence of first time home buyers as the affordability index has improved by approximately 35%  over the past 90 days alone.  When you look at continued flatter prices, and the prospects of lower payments due to reduced interest rates in Q1 2009 then first time home buyers need to get out there.Why?  Because interest rates will go back up when the economy recovers by mid next year, and as we mentioned earlier the market will heat up in the latter half of the year which will see less choice, and potentially higher prices as the housing market stabilizes in it’s own recovery.

What will the Bank of Canada do tomorrow with respect to interest rates…It likely doesn’t matter much what they do tomorrow but rather what is the outlook over the next couple of rate setting dates?  For the record the conventional wisdom is that they will drop .50% and the market is likely already priced that in.  As such it would be nice I think if they did .75% to be a nice welcome surprise for the market.  Regardless I think we could expect that the rates will be at least another 1% lower over the next two rate setting dates to come in at 1.25% (which provided the retail banks match the cuts would put Prime at 2.25%)  There is an outside chance we could see the bank rate go to 1% and consequently Prime to go to 2%.Could you imagine what effect that will have on consumers who have Prime minus .90% mortgages that were offered as early as this year?  1.10% mortgage rate…it is things like this that make us all wonder what is the new normal?