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Analysts Warn Of Developing Housing Bubble In Canada

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Analysts Warn Of Developing Housing Bubble In Canada

Canada’s major cities have seen continued inflation in house prices for years.

But as the rest of the country flattens, bankers and analysts are warning there may be trouble ahead…

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The Hottest Home-Buying Cities In Canada

  • Vancouver leads the pack, with residential property prices in the Greater Vancouver area pushing 30% past last year’s figure for the month of May. The average price of a house near the city is now nearly Can$1.2 million!!! That’s just over $900,000 American.
  • Toronto prices are up 15% over the same period. Average house price: Can$734,000 (US$570,000).
  • The rest of the country averages out to a 13% increase over the last year with an average price of Can$509,500 (US$395,100).
  • Relatively poor performers are Alberta and Newfoundland, where prices have not really grown and the average price has hovered just over the Can$300,000 (US$232,000) mark.

See here the performance of the provinces between May 2015 and May 2016:

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As you can glean from the graph, the story is not positive in every part of the country.

Sales volumes are starting to fall in the more expensive regions, leading analysts to predict a slump.

The Canadian Prime Minister has already named this the “Vancouver Housing Crisis”.

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Banks Foretell A Topping-Out

The Bank Of Canada has started telling prospective home buyers in Vancouver and Toronto that prices are likely to stop climbing soon.

This prediction is based on some fundamental laws of economics: when things get too expensive to buy, people stop buying.

When people stop buying, things get cheaper.

Analysts Feeling Queasy

That predicted fall-off in interest and cessation of price growth is what’s worrying analysts.

Capital Economics’ Paul Ashworth says it’s a very big bubble.

He sees a building glut of household debt being caused by the current high prices.

Without a high-price market to sell these properties back into for a profit – a lot of people are going to be a loss.

That loss will domino through the banks and into the economy at large.

Bank Of Montreal economists Doug Porter and Robert Kavcic filed a report on Wednesday that cites the “obvious factor” behind property market growth as low borrowing costs.

However, they also point out that the Vancouver and Toronto are tent-poling the whole market, which is otherwise performing mildly.

That introduces other important factors, like foreign buyers – something BMO and the Prime Minister agree on.

Trudeau Blames The Foreigners!

Justin Trudeau, Canada’s popular new Prime Minister, sees the influx of Asian capital to Canada’s wealthiest cities as a destabilizing factor.

His options, he says, are limited, as action taken at a Federal level to ease growth in Toronto or Vancouver would have to apply across the board. 

That would detriment the smaller markets like Calgary, Montreal, and Halifax.

Banks Unfazed – With One Exception

On the whole, the Canadian banking sector isn’t sweating too much yet.

They claim the risk of a downturn is limited because employment and interest rates remain high.

Ashworth calls that kind of thinking “naive in the extreme.”

One exception in the banking sector is the Toronto Dominion Bank.

TD says a housing market correction is imminent.

They summarize Bank Of Canada’s “fundamental laws of economics” as “Stretched Affordability”.

So When Will It Happen?

TD sees housing prices easing their growth over the next six months due to rising borrowing costs.

They implicitly encourage the government to enact legislation to curb speculation on the housing market.

Without such a move, they foresee solid slowdown indicators emerging over the course of 2017.

Ashworth is less certain on timing, and he admits that his firm has been describing this bubble for the last five years.

However, this year has seen top markets grow 5-10% month-on-month.

That can’t be sustainable at these levels for long, and he notes that the growth of house prices in the top cities already outstrips the highest levels of growth in the US prior to the crash there.

And What Happens Then?

Ashworth stresses that the link Bank Of Canada seems to see between property prices falling and mortgages defaulting is more complicated than they make out.

Like any market, a large factor in its performance is based on human intuition – acting based on anticipated performance.

Right now, the market is growing in part based on anticipated growth – and if the coverage, opinions, and evidence of a coming slump start to convince people, it could self-fulfill just as easily as the growth has.

Given that this is just the most unpredictable factor at play, Ashworth plucks an inflection point out of some thin well-educated air: 20%.

If Canada sees a 20% fall in the top markets, he foresees a danger of the price fall and loan foreclosure combo becoming a self-reinforcing feedback loop.

Put more succinctly: a Canadian crash.

Let’s hope he’s wrong.

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Business

Stock Market Recovery Sets Record, Is Melt-Up Next?

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Stock Market Recovery Sets Record, Is Melt-Up Next?

It’s been 100 trading days since the lows on March 23. The rebound we’ve just experienced is the largest in the last 90 years.

The S&P 500 has rallied more than 50% since the lows, and that’s the biggest 100-trading-day rise since the period ending Aug. 18, 1933, according to Dow Jones Market Data.

Bespoke Investment Group noted the same thing yesterday, sending out a tweet that said “Tomorrow the S&P 500 will mark 100 trading days since the Covid Crash low on 3/23. The ~50% gain over the last 100 trading days would be the biggest since 1933.”

The whipsaw action in the S&P has been one for the record books, with the fastest plunge into a bear market in history, followed by an equally-historic recovery.

Not to be outdone, the Dow Jones Industrial Average also remains on pace for its largest 100-trading-day gain since August 1933. Additionally, the Nasdaq is on pace for its best 100-trading-day gain since the peak of the dot-com bubble in March 2000.

A Melt-Up Happening Next?

This massive run-up has at least one Wall Street veteran wondering if the next step is a melt-up.

Ed Yardeni, chief investment strategist at Yardeni Research, said in a recent blog post, “We live in interesting, though not unprecedented, times. The Roaring 1920s could be a precedent for the Roaring 2020s.”

He compared the 1918 Spanish flu pandemic that preceded the Roaring 1920’s to the coronavirus pandemic today. The current crisis could precede the Roaring 2020’s.

“The good news is that the bad news during the previous precedent was followed by the Roaring 20s. So far, the 2020s has started with the pandemic,” he wrote. “But there are plenty of years left for the prosperous 1920s to become a precedent for the current decade.”

“Today’s doomsters could be confounded by biotechnological innovations that deliver not only a vaccine for COVID-19 but for all coronaviruses. Scientists are investigating an array of approaches to fight COVID-19. Hopefully, beyond finding a cure or a vaccine, one of the beneficial outcomes of all this research will be that scientists learn many more ways to combat illnesses in general and viruses in particular,” Yardini added.

So where do we go from here?

Yardini believes we’ll have a strong finish to the year for the S&P 500 due to more stimulus and a resilient bullish trend. He predicts the momentum will carry into 2021, where the S&P could end the year with a double-digit gain.

“The 1920s ended with a stock-market meltup followed by a meltdown,” he said. “The 2020s may already be seeing a meltup, begun on March 23.”

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President Trump Vows To Lower Capital Gains Taxes During Second Term

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President Trump Vows To Lower Capital Gains Taxes During Second Term

If he’s victorious in November, President Trump has vowed to lower capital gains taxes. He sees it as another way to help the country recover from the coronavirus pandemic.

During an appearance yesterday on Fox Business with host Maria Bartiromo, Trump said “I’m going to do a capital gains tax cut to 15% in the second term. We’re going to get it down to 15%. It’s at 21%. We’ll get that down to 15%. I’ll get that done easily.”

Taxes on long-term capital gains – when an asset is held for more than one year and then sold – range from 0-20%. The exact number depends on the individual’s income bracket. Wealthier investors also pay an additional 3.8%. Short-term capital gains – when an asset is held for less than one year and then sold – are taxed as ordinary income.

President Trump can’t slash the capital gains tax rate on his own as he would need the Congress. However, he can try to sidestep Congress by indexing any long-term capital gain to inflation.

Trump had floated the idea of indexing capital gains to inflation last year before ultimately pulling the plug. At the time he told reporters that the idea was “perceived as somewhat elitist” and “better support for upper-income groups.”

Lower Taxes and Capital Gains

By indexing capital gains to inflation, Trump is trying to lower taxes. In particular, he tries by making a portion of gains exempt by adjusting the original purchase price to match inflation.

The Tax Foundation has a relatively straight-forward example:

“Proposals to index capital gains can vary, but generally they allow individuals to gross up the basis of their assets when calculating their capital gains to account for changes in the price level over time. For example, if an individual purchased an asset for $100 on January 1, 2000 and sold that asset for $200 on July 1, 2018, the nominal capital gain would be $100. However, inflation over that period increased the price level by 49 percent. Under an indexing proposal, the individual would be able to gross up the basis of $100 by the total inflation during that period to $149. As a result, the individual would only be taxed on $51 instead of the full $100.”

Naturally, by lowering taxes the government would see a drop in revenue from collecting less taxes. Interestingly, the Tax Foundation says that the revenue drop will be somewhat muted. This may likely happen because individuals will be losing less of every dollar on taxes. Therefore, people will have more to spend.

“The increase in output due to the lower cost of capital would boost incomes, which would boost payroll revenue and slightly offset individual income tax revenue losses.” notes the Tax Foundation.

What to Expect From Opposition

And while Trump is doing everything he can to lower taxes, he warns that his opposition is going to raise taxes.

“They want to tax $4 trillion, it’s going to be the biggest tax increase in history by far,” Trump told Bartiromo. “They’re big taxers. It’s just something that won’t work. We’ll have – you will see a depression the likes of which you have never seen. You’ll have to go back to 1929, I guess it doesn’t get too much worse than that.”

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Business

UBS: Economy Still Facing Deep Risks

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UBS: Economy Still Facing Deep Risks

Economists at UBS warn that even after an uptick in economic activity in May and June, the pace of recovery slowed in July as consumers, workers and businesses remain cautious.

The economists believe that the unemployment rate will be hovering around 10% by the end of the year. However, they do expect a strong jobs recovery next year as the country wins the battle against the pandemic. They expect the country’s GDP to rise 5% in 2021 as the economy slowly returns to normal.

The Basis of Models

UBS’ chief US economist Seth Carpenter added that the models that UBS is basing their GDP projections on don’t factor in a large increase in new infections. This is something that could add another hurdle to the recovery. Alan Detmeister, a UBS economist, believes that the recovery is less about the number of cases. Instead, it’s more about the level of restrictions in place.

“The risks are deep,” said Carpenter during an interview with MarketWatch. He points to three challenges facing the economy as it tries to recover. These three include overall job growth is now slowing, incomes are falling, and both households and businesses are hesitant to make long-term plans.

When it comes to job growth, UBS economists are focused on what he calls “labor-market scarring,” according to Carpenter. He’s worried that the next 6 to 12 months could exhibit a “prolonged dislocation in the labor market,” and added, “What’s going to drive this is how fast people get their jobs back.”

The group also noted that except for the automotive sector, manufacturing jobs saw a drop in growth during July. The labor-force participation rate also slipped in July after gaining ground in May and June. “And within the employed, a large share remained either part-time for economic reasons or employed but not at work,” they noted.

Income Drops to Slow Recovery

Falling incomes will also slow any economic recovery. The bank warns that household incomes will drop 10% at an annual rate. This is due to the expiration of enhanced unemployment benefits and at least thus far, no additional stimulus checks. Even with an extension of unemployment benefits or another stimulus check, the economists say it won’t make up for the massive financial relief that was “the lifeblood to prevent the economy from tanking” from March through July.

This drop in incomes is putting further strain on the retail sector. Bankruptcies are piling up, most recently with Stein Mart announcing it would enter bankruptcy and will likely close most, if not all, of its 300 stores.

Neil Saunders, managing director at GlobalData Retail, notes that Stein Mart is just the latest retailer to go under. He’s also sure that won’t be the last. “The failure of Stein Mart is not only the latest in a long line of retail bankruptcies, it also underlines that even traditionally robust segments like off-price are not immune from pandemic-induced disruption.”

He added, “For a company that, at the start of this year, was in the process of selling itself to a private investment firm, the bankruptcy is an abrupt change in fortunes that shows the immense damage the pandemic has inflicted on retail.”

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