A Tale of Two Economies...

[EJ]

Re: A Seriously Unbalanced Economy...

Yikes! I didn't know about that.
They're betting that house values never go down and interest rates never go up?!?

Most of us here in the U.S. we think 15-year and 30-year fixed rate mortgages are available everywhere. Not so. It is practically a U.S.-only phenomenon. In Europe as I recall they are only avilable in Germany and the Netherlands.

[lakedaemonian]

Re: A Seriously Unbalanced Economy...

Most of is here in the U.S. we think 15-year and 30-year fixed rate mortgages are available everywhere. Not so. It is practically a U.S.-only phenomenon. In Europe as I recall they are only avilable in Germany and the Netherlands.

Yup.

Way down here in little old, first world open/free economy New Zealand our mortgage rate chart looks like this:

http://www.interest.co.nz/borrowing/mortgages

IIRC the vast majority of mortgages in NZ are variable to 3 years fixed but can go up to 5 years fixed and rarely to 7 years, typically at quite high cost(on up to 30 year amortisation tables).

And our property market is already going "full retard".

American 30 year fixed, very low interest mortgages in NZ and elsewhere would be like injecting deuterium/tritium into an already nuclear property market.

It would be like turning Trinity into Tsar Bomba.

[Fiat Currency]

Re: A Seriously Unbalanced Economy...

who is holding all those canadian mortgages? were/are they securitized? in risk tranches or just bundles? are the issuing banks holding them? is there a canadian federal agency which has been hoovering them up? inquiring minds want to know.

The answers you seek are here in a thread almost 4 years old now …

Bubbles 2.gif

[Fiat Currency]

Re: A Seriously Unbalanced Economy...

In the US mania a few smart and brave people made good money shorting the bubble.

Does Canada offer similar opportunities now?

In my response to jk … that linked thread has some articles/links on some entities that one can short, if that's what you're asking.

[GRG55]

Re: A Seriously Unbalanced Economy...

Bank of Canada warns house prices are overvalued by up to 30 per cent

OTTAWA — The Bank of Canada estimates that house prices in the country are overvalued by as much as 30% in a report released Wednesday that warned household debt remains the biggest risk to Canada’s economy.

The Bank of Canada released its Financial System Review Wednesday, a bi-annual look at the major risks threatening Canada’s financial system.

For the first time, the bank published its estimates for house price over-evaluation in Canada, putting the reading at between 10% and 30%.

Highlighting the importance of high household debt and strains in the housing sector, the central bank has developed a new method of evaluating these risks — based on house price corrections in 18 counties in the Organization of Economic Co-operation and development dating back to 1975.

“The most important risk is the inability of stretched households to service their debt should they face a sharp decline in their incomes or a sharp rise in interest rates, which could trigger a correction in house prices,” the central bank said.

The probability of this happening is low . . . But if it did, the effect on the economy would be severe

“The probability of this happening is low,” it added. “But if it did, the effect on the economy would be severe. The bank maintains its assessment of this risk as “elevated.”

more...

As recently as September this same Bank of Canada was insistent there was "no housing bubble in Canada".

[EJ]

Re: A Seriously Unbalanced Economy...

As recently as September this same Bank of Canada was insistent there was "no housing bubble in Canada".

When my friend Seth came to me three years ago with his Short Canadian Real Estate idea I thought, How can it be that such an obvious idea can make money?

Obviously Canadian real estate is over-priced.

Obviously government subsidies of the residential mortgage market are largely responsible.

Obviously the Canadian economy is overly dependent on natural resources, which dependency will in the future make it harder for the government to finance the housing market when commodity prices fall.

The logic is so compelling that it was pitched to me as if betting on a housing crash triggered by an eventual decline in energy prices is like making a Tuesday bet on the likely arrival of Thursday.

But then everyone knows Thursday will arrive, so how can you make money betting on it?

Because so few actually following this and even fewer believe it, he said. Most are oblivious or are in denial.

Three years later are we about to see this bet can pay off, on "lightening strikes again" ala the U.S. Housing Bubble crash but in Canada?

I don't think so.

As tempting as it is to compare the financial conditions of countries, foundational cultural and institutional differences are nearly always more significant than surface similarities.

The primary antecedent to the crisis in the U.S. as I covered it here from 2004 to 2008 was corruption. The financial sector owned its regulators. They looked the other way while Credit Risk Pollution was poured into the U.S. and global financial systems while financial firms made billions selling fraudulently rated securities.

Canada may have some over-priced houses but its bankers and politicians can't compare to the boyz on Wall Street and the politicians they elect when it comes to setting an economy up for a fall.

Who can do more damage to an economy? This guy?

Or this guy?

I rest my case.

[Fiat Currency]

Re: A Seriously Unbalanced Economy...

… Who can do more damage to an economy? This guy? … Or this guy?

I rest my case.

Careful - there's always Black Swans out there like this guy …

Stephen Poloz: I Wonder What The Banking System Looks Like In Star Trek

Bank of Canada governor Stephen Poloz is casting around for new models for the financial system in the wake of the Great Recession, and he’s looking to Star Trek for inspiration.

“How blue-sky do we want to get? Does anybody besides me wonder what the banking system looks like in the background of Star Trek?” Poloz asked an audience at the Economic Club of New York on Thursday.

And in an even stranger turn, Poloz appeared to suggest that a dystopian vision of economics presented in Margaret Atwood’s novel “The Year of the Flood” could be a financial model for the future.

“Now that’s blue-sky thinking,” Poloz said. “People work for a massive corporation, live in the corporate compound, go to corporate restaurants and events, and bank with a financial intermediary wholly-owned by their own employer, which in turn invests the funds in growth for the corporation.”

Poloz described this as “the corporatist model of finance,” and admitted it was a “far-fetched” idea but was presenting it to his audience “as an illustration that the sky really is the limit in this space.”

But the “Star Trek” model is certainly more radical, if not nearly as scary as Atwood’s vision.

In the Star Trek universe, money has been eliminated altogether and, in the words of Capt. Jean-Luc Picard, “people are no longer obsessed with the accumulation of things. We have eliminated hunger, want, the need for possessions.”

Though Star Trek’s writers have never fully explained how a society moves to a cashless economy, they were probably right in assuming that scarcity -- the fundamental problem of economics -- would have to be solved first.

Not an easy task.

It’s been a busy week for Poloz, whose financial system review released this week ruffled some feathers in the mortgage and real estate business by asserting that house prices in Canada are 10 per cent to 30 per cent too high.

The Bank of Canada governor followed up on that in his appearance at the Economic Club Thursday, arguing that despite the overvaluation, he doesn’t see a housing bubble burst in Canada.

"We don't think we suddenly became over-valued in a bubbly type way. We don't think of this as a bubble in any way," Poloz said, as quoted at Reuters.

Perhaps I should cross-post this to my Death of Cash thread.

It's a good thing I stocked up on dilithium crystals and gold-pressed latinum

[GRG55]

Re: A Seriously Unbalanced Economy...

The Canadian housing bubble's worst influence is on the rest of the Canadian economy. If the idiotic stories in the mainstream press were accurate, all those rich foreigners (read "Chinese") being blamed for driving up house prices should be applauded; after all they are injecting net capital into the Canadian economy. Unfortunately perception is far from reality. The overwhelming majority of houses are purchased by Canadians, and house prices continue to be propelled upward because all those purchases involve people willingly taking on extraordinary levels of personal debt. Housing is a fundamentally unproductive asset that now absorbs too much of the national savings and income to the detriment of the rest of the economy.

Nearly 8% of the Canadian workforce is employed in housing related construction, measurably higher than what the USA experienced at the peak of its bubble circa 2006. Housing is estimated to directly make up almost 20% of Canadian GDP, and if the indirect activities in the finance sector are included that estimate is now 27% of the entire economy in the frozen white North.

The wages that companies (including the company I run) have to pay staff in Alberta in order for them to afford to live here has, for some time, been completely out of line with the value of the productive output most of them can generate. $100 oil, cheap mortgages, increasing employment dependence on housing construction and a Canadian $ at par with the US$ can cover that up for a while...but not forever. The first indication that things had, once again, gone too far was when the Loonie exchange rate cracked. That's the way Canada always starts the process of overcoming its yawning productivity gap with our American cousins...the "politically correct wage cut". A filler of slowly rising unemployment coupled with the icing of collapsing commodities and personal debt deleveraging will further the adjustment, just as it has so many times in the past.

[dlaw52]

Re: A Seriously Unbalanced Economy...

Excellent points. For Canadian's who were around in the early eighties its like a repeat of a B rated horror film.

[EJ]

Re: A Seriously Unbalanced Economy...

It'll come back and comment on this in detail later but for now I'll note that home price inflation peaked simultaneously for the U.S., Canada, and China in Q4 2013, is steady in Germany, is finally nearly positive in Spain, and remains slightly negative in Japan as it has since Q4 1992.

[GRG55]

Re: A Tale of Two Economies...

From "The REAL Petrodollar Is The One Printed North of the 49th" file:

[from Brian Ripley's always informative and entertaining site]

Over the years I have always enjoyed sharing variations of the data in the top chart with my "let's stop everything" relatives (wife's side of the family!) back in B.C., and some of the nitwits that delude themselves by thinking we still have a competitive manufacturing industry in Central Canada.

[touchring]

Re: A Seriously Unbalanced Economy...

December 9th, 2014

On one side of the river is a depressed little Ontario town of 29,000 souls, and on the other is a city in New York State with ten times the population, a daily paper, three local TV stations, pro hockey and football teams. The median home price in Buffalo is $69,900. But yards away in Fort Erie, it’s $179,680.

Niagara Falls, Ontario, is a little more upscale and home prices reflect it, at $215,625. But that same money will buy you three houses across the gorge in Niagara Falls, New York, where the average is $60,500.

These bizarre differenials are consistent from coast-to-coast. The median house price in Canada is now $402,100, while in the States it’s just $222,900. A survey done (and published in the aghast Buffalo News) showed that of 10 sets of border communities, houses on the Canadian side cost more in nine. The only exception was Burlington, Vermont ($266,950), which sits across from Saint Jean Sur Richieu, Quebec ($213,850).

The real estate bubble in Vancouver is nothing compared to what's happening in places like Hong Kong or Singapore.

How about speculating in parking lots?

http://money.cnn.com/2014/10/09/real...parking-space/

I believe that Singapore has the lowest mortgage rate in the world. A $1 million Singapore dollar 30-year mortgage only costs $3,300 a month to service. Assuming that interest rates won't change, over a 30-year period, you would only pay $1,188,000 in mortgage repayments. Does this sound logical?

http://www.imoney.sg/home-loan#/pagetab-nav

[GRG55]

Re: A Tale of Two Economies...

From the Oils Well That Ends Well file:

[or maybe not]

[jk]

Re: A Tale of Two Economies...

From the Oils Well That Ends Well file:

[or maybe not]

as intriguing as that chart is, i think it's not correct. i would imagine [correct me if i'm wrong] that the methodology was to subtract out rises in employment in alberta, or in the energy business, leading to the other graph. HOWEVER, the conditions that led to the alberta boom were high oil and petrol prices. if we assume that oil and petrol prices were significantly lower, the other parts of the economy wouldn't have been subject to the drag of those high prices. i.e. the rest of the economy would have done better. so i don't think it's so simple.

[Fiat Currency]

Calgary Oil Patch Veterans on downturn ...

I thought I'd put this here ...

‘Sometimes the lessons are painful’: Oilpatch veterans reflect on life in a downturn


THE CANADIAN PRESS/Jeff McIntoshBooms and busts come with such consistency in Canada's oilpatch, most are primed to ride them out.
CALGARY – The oil shock is rattling investors, building angst among oil dependent governments, and fuelling views that Canada’s dramatic oil growth story is coming to an end.

But in Canada’s oil patch, where booms and busts come with such consistency most are primed to ride them out, some welcome the opportunities they present and the renewed discipline they leave behind.

Four senior Calgary-based Canadian oilmen offered their views this week to the Financial Post’s Claudia Cattaneo about how they see the sector reacting to the crash, how long they expect it to continue, and how the see the rebound playing out.

Bill Andrew, 62, chairman and CEO, Long Run Exploration Ltd.; former president and CEO of Penn West Petroleum Ltd.:
When I started here in the mid-1970s, Amoco was pulling out. The journals of the time were saying the oil days were over. So, that was 40 years ago.

I have been through many up cycles, many down cycles, and flat cycles, too.

We will react to this one the way we have done before: Some of the more aggressive companies will probably use this to their advantage and make acquisitions.

For companies like our own, that are guilty of poor timing on acquisitions and made acquisitions early last year, before prices dropped, it’s just a matter of living to find another day. You trim your capital program and make sure you are trying to capture any cost efficiency, hold your service companies’ feet to the fire and see if you can squeeze out any savings from them, and just survive.

This thing is not going to last forever. If it does last longer than six or nine months, and we are into a new paradigm of low oil prices, the cost side is going to follow. We successfully operated in this business at US$18 oil, and US$22 oil, and US$35 oil, and costs have certainly inflated over the past 10 to 15 years, with the robustness of the oil sands and the demand for services up there. As those things slow down and the demand for services slows down, you don’t need US$100 oil.

Oil companies have already aggressively started to cut budgets. If these conditions continue through the first quarter, we will virtually be shut down through the summer as an industry.

If we are sitting in April at US$48 oil and US$2.85 or US$3 gas, a lot of companies will say: What is the point? Why drill, if it’s costing you $15 or $20 to add a barrel, and your netbacks are less, and there is no room for risk, and there is no return on your money?

So you stop. You shut down your exploration program. You shut down any ideas on building facilities. You run with what you have got, trying to make sure you flatten your declines a little bit, work on optimization. The time I remember when we really had to do that, in the early ‘80s, after the National Energy Program, the capital program was severely reduced. But we still hung on, and we tried to squeeze every mcf of gas and oil barrel out of the ground.

But it will take time to get started up again. We’ve been accused in this industry of being slow to understand when prices are going down, but we are equally as slow understanding when there is a recovery. Once you get burned, you are reluctant to ramp up and get going.

Verne Johnson, 70, chairman, U.S. Oil Sands Inc.; chairman, Petromanas Energy Inc.; former CEO, ELAN Energy Inc.:

These are not chicken-little events. The sky is not falling. It’s just cloudy. These are times of the greatest opportunities you will ever see, whether you are just an investor or whether you are a company that is capable of doing acquisitions. Investors can make more money this year than they probably did in the last three years combined. There are outstanding companies whose stocks have been taken down, and even ones that are still paying and will pay a dividend, and yields are double digits. It’s fill your boots time. That is what this is.

Claims that Canada’s oil growth story is over are nonsense.
The price is down, the price goes back up, and it will. The 2008/09 downturn was worse. People would have said then that it was the end of the world. Certainly, while prices are low, cash flow is low, you have to cut costs and that is what people will do. But that is just an intelligent reaction, not the end of the business. It’s a transition. It happens every eight or 10 years and it’s happening again. It’s just the end of the last cycle and it’s now time for investing in opportunities that will return you phenomenal rewards. Do it now.

The difference this time around is shale oil, particularly U.S. shale oil. But in the absence of high oil prices, expensive projects will slow down. Shale oil has steep production declines. The oil supply will contract and the oil price will strengthen. It’s not going to be US$150 in the next two years, but it’s going to be highly profitable in the next year and two years for everybody, including the oil sands.

What you don’t do in these circumstances is take on debt. If you are going to do acquisitions, and use debt to do it, it’s only if you are an extremely strong company. The Canadian oil industry has learned painfully every cycle about carrying high debt, and if you do, it imperils your whole business and companies go out of business during downturns.

Canada’s industry generally has been debt-averse since the days of Dome [Petroleum].

Experience is the best teacher. Sometimes the lessons are painful, but well-learned, and so when the next downturn comes, people are able to deal with it.

They also know that it’s going to come back and to be ready for it.

Don Rae, 65, president and CEO, Coral Hill Energy Ltd.; former president and CEO, Wave Energy Ltd.; former senior vice-president, exploration, Penn West Petroleum Ltd.:

There are small oil shocks and there are big ones, and this is a relatively big one. You have to be ready, because there is cyclicality to these events. You have to manage your debt. Obviously when it happens you trim back.
But there are a lot of positives during a quiet period like this. It allows you to readjust the exploration side, to rethink your plays and develop new ones. It allows you to adjust your cost structure. It allows you to innovate for instance on drilling techniques, drilling fuel usage, completion techniques. It allows you to prioritize your projects better than you might have otherwise done. And then you become efficient with your production, get your operating costs down.

It’s a good time for long-term thinking. These are opportunistic times for those in a position to do acquisitions, or who were having trouble to consolidate plays, or getting services.

It will take a while for supply to slow down because you probably have to wait for declines in some of these new tight oil plays, which are fairly steep.

I think an oil bubble is going to be different from a gas bubble. The gas bubble that we have in North America is significant.

I don’t think the oil bubble will last for a long time. Is it two months, six months, 12 months? I can’t tell.

The big problem is when you come out of the low. The solution for low prices is low prices. From the past cycles I have seen, demand bounces back a lot quicker than any of the government agencies project.

But investment will slow down, which is good. I personally think there has been over-drilling in the United States in some plays. I think there has to be more financial prudence on the drilling side. I think there could be less investment in the oil industry down the road as well.

Obviously, people would lose jobs, but that can turn around pretty quickly, too. The prudent people won’t want to do layoffs. They know they need good staff when they come out of this.

I don’t Canada’s oil growth story is over. There is lots of room to grow. It will slow down the pace, but maybe our growth was too fast and governments were getting complacent that the revenue would keep coming in.

Mike Graham, 54, chairman of Saguaro Resources Ltd.; former president, Canadian division, Encana Corp.:

If you have been around Calgary long enough, you have seen a lot of cycles. I like to see cycles like this.
The biggest thing is to not outspend your cash flow. Most people will live within their means. Keep your powder dry and there will be lots of opportunity. I think there will be a lot of merger and acquisition activity over the next year. You are starting to see that companies are looking at that right now.

You manage through these cycles by trying to keep your balance sheet relatively clean and you cut back your capital where you can, do your best projects because you want to keep a semblance of a program going, and you live to fight another day.

As long as the oil price is above your operating costs you are going to keep producing. Most operating costs, especially the stuff we are in, are in the order of $20 to $25 per barrel, so even at $50 oil you are still making some money. You keep producing it until such time you get down below your cash costs. You are probably not going to make too much money on the new projects.

I would guess you would see a fairly strong recovery within six months to a year. I don’t think Saudi Arabia or the rest of the producers want oil at this price. At some point, they will capitulate.
There is a lot of geopolitics right now, with Saudi Arabia looking to keep their market share. They are looking to make sure that the world, especially the financiers, are nervous about the light oil plays in the U.S. That’s the difference this time. The growth of the Lower 48 shale plays, where they essentially doubled their production over the last five years.

But it’s definitely higher cost production and it will come off hard if oil prices stay where they are. I think the Canadian plays like the Duvernay and the Montney can compete with any of the plays in he U.S. But it’s tough for Canadian heavy oil in this period, when you get these really low prices and their operating costs are higher.

The unintended consequence is that people who don’t have strong balance sheets will be going broke, or will be looking at selling some assets at distressed prices, and that happens in every cycle.