Central banks buy time for commercial lenders

Globe and Mail - Update December 18, 2007

Following up on their united pledge of last week to make more money available for terms that extended into the new year, the European Central Bank, the Bank of England and the Bank of Canada flooded short-term credit markets with accessible cash. The U.S. Federal Reserve made its own injections on Monday.

The flood of cash has greased the wheels in many short-term credit markets, ensuring that commercial banks have enough money on hand to tie up loose ends before the New Year and fund Christmas shoppers' annual needs for liquidity.

While much of the intervention had been foreshadowed by the joint announcement last week, the ECB took markets by surprise by going well beyond its initial intentions. It infused about $500-billion (U.S.) into money markets – the largest injection yet for that central bank, and one that was quickly gobbled up by some 390 financial institutions.

The Bank of Canada infused $2-billion (Canadian) into short-term markets, more than the $1-billion it announced as a minimum last week.
When the five European and North American central banks made their announcement last week, many analysts were skeptical that liquidity injections into short-term money markets would do anything substantial to ease the credit squeeze that threatens to undermine economic growth.

But since then, economists have lowered their expectations, and aren't looking to the central banks to solve the credit issues. Rather, they say the central banks' role at this point is simply to make sure money markets are liquid enough to remain functioning while commercial banks sort out their exposure to U.S. subprime loans.

Essentially, the central banks have bought commercial banks some time to figure out their losses, said Stewart Hall, market strategist at HSBC (Canada.).

“Large banks are now awash with cash. The issue is not whether they have enough cash, it is whether they are inclined to lend,” the Bank of England's governor, Mervyn King, said yesterday.

At the core of their unwillingness to lend is fear about losses connected to failing subprime loans.

Analysts believe the exposure will amount to at least $300-billion (U.S.) on the balance sheets of commercial banks, and only about $80-billion of that has been officially acknowledged.

Interbank lending is priced high because lenders don't know where the rest of the losses are hidden, Mr. Luxton said.

REM: Do you really think this is the solution? The word on the street is that this is not a liquidity problem but a solvency problem. Do you agree or disagree?

Dodge says credit conditions could get worse

"These difficulties are expected to persist for a longer period of time than previously thought," he said, adding that the weakness in the U.S. has increased the risk that exports will decline further.

"All of these factors considered the bank judges there's been a shift to the downside in the balance of risks ... ," he said.

Dodge said the bank expects weaker economic growth in the fourth quarter of this year and the first half of 2008.

REM: Except in BC where it is the land of milk and honey.

However, the Canadian economy is still operating above its non-inflationary capacity, said Dodge, who is retiring as governor at the end of January.
"Given the strength of domestic demand and weak productivity growth there continue to be upside risks to the bank's inflation projections," he said "However, ... other developments ... suggest the downside risks to the inflation projections ... have increased."

REM: It would be nice if he could pick a side.

Dodge's semi-annual testimony to the Senate banking trade and commerce committee came as the central bank released a report saying that the Canadian economy - including the business sector - was in good shape to weather the global financial turmoil resulting from the U.S. housing market meltdown and the fall in the greenback against most currencies, including the loonie.

"There will be some impact on the Canadian economy directly through credit spreads and availability, and indirectly through the effects on the U.S. economy," it said bank said in a Finance System Risk Assessment in its latest Financial System Review.
"The effects on the Canadian financial system, however, should be mitigated by the strong balance sheets of financial and non-financial corporations built up through years of strong growth and substantial profits."

Yet, it also warned that there is a "low" risk that the U.S. and global financial and economic situation could deteriorate more than expected.

REM: I think they are down-playing this “low” risk. There has been much talk about certain rescission and the credit conditions deteriorating well into 2008 over the past couple months in the US. There are also those that disagree with this. The one thing I have learned is that when the sheep believe in a boom or bust the psychology and not the fundamentals behind it seem to prevail.

If that occurred, the greater-than-expected slowing in the economy of the U.S., and possibly globally, together with a rise in the loonie would "increase stress on Canadian businesses, households and financial institutions.

"This might threaten the viability of some firms," it warned.

Meanwhile, in a separate report appearing in the Financial System Review, the central bank said heavily indebted households are becoming more vulnerable to financial or economic shocks, including a rise in interest rates.

REM: Heavily indebted household do not become vulnerable, they are vulnerable, one hiccup and the party’s over.

Full Storey Here

Increased real estate prices encourage boomers to invest

As real estate prices rise sharply across the country, more boomers seem to be focusing on property as an investment vehicle.

According to the most recent Statistics Canada Survey of Financial Security, "a significant change in the composition of assets during this six-year period was growth investments in real estate such as cottages, timeshares, rental properties and other commercial properties."

The value of real estate holdings, excluding principal residences, increased by 80.5 per cent between 1999 and 2005. This, notes the survey, was "by far the largest rate of growth of any asset type."

Realtor Brent McElheran of Royal LePage Team Realty, who specializes in the urban condo market, frequently deals with boomers purchasing investment properties and pieds-a-terre (a house or apartment that one keeps as somewhere to stay on occasional visits) in downtown Ottawa.

"Some are downsizing, but many of my clients are buying condominiums as investment properties to rent out," he says.

Other buyers buy and sell without renting, speculating the market will continue to rise, as it has done over the last decade. According to the Canadian Real Estate Association, the average selling price of a house across the country was $324,312 in the first three quarters of 2007, almost double the average $154,606 selling price of 1997.


Link

REM: Would like to know where all these boomers are investing in real estate that has cash flow - certainly not Vancouver BC.

Bullish on Canada

Are you Bullish on Canada? Michael Levy of Custom House gave his outlook on Canada in his final contribution to the World Market Update.

We start with energy because the vast reserves of oil and natural gas in the ground will some day make Canada the world's largest supplier of fossil fuels to the world.

When the method of efficiently extracting the oil reserves from the Canadian oil sands is perfected, and that could be a few years down the road, Canada will even match or surpass the likes of Saudi Arabia and become one of the richest nations on earth because of our ability to safely produce and refine energy products whose world demand continues to grow at record levels year over year.

The world will continue to need our commodities whether the aforementioned energy products, base metals, lumber, precious metals, water, power from the likes of Quebec (and B.C. once again as more hydro is produced in the decades to come), grains from the prairies, and the list goes on.

The list is endless and includes most all the base metals used in the manufacturing of just about everything from cellular phones to electronic devices to automobiles. Base metals that come from Canada.

Canada is the only country in the G-8 that does not have a budget deficit; in fact in the past 10 years where the U.S. national debt has almost doubled to over $9 trillion, Canada has actually paid off over $92 billion on our sovereign debt.

Canada is going to become the lowest taxed regime corporately in the industrialized world, with federal income tax on businesses coming down to 15% in the next five years; an invitation for industries and corporations of world to set up shop in our country.

Canada is safe geo-politically, has a stable government, and invites the world to our doorstep.

Our dollar will once again go back past the recent highs of November and could in years to come go to $1.20 or $1.30 U.S., or even higher as our economy explodes as the world demands what we produce.
Get the full story here.

REM: Agrees that Canada is well positioned to capitalize on its abundant resources. When the world does comes knocking on our door, the good fortune will spill over into the real estate market. Those areas that are close to the action (resources) will see strong gains in real estate value.

Fraser Valley Real Estate

I recently attended a seminar that covered the current trend of development land in the Fraser Valley. The following trends were covered:
*Demand for development land is high in the FV
*The market for development land is still rising.
*Development land in the FV is selling on average in the 700,000 to 1,000,000 per acre.
*Developers are building up as opposed to building out
*Many small individual sites are being purchased, assembled, rezoned and then flipped.
*Development sites are being purchased and flipped in 12 to 24 months for a 25% to 50% return.
*Difficult parcels to develop (i.e.topographically challenged and or creeks) are selling at a premium (all the prime sites are gone).
*A premium is being paid for land designated as future development sites - 10 years and beyond.
*This point I found most interesting - investors are coming in and snapping up multiple units during the project presale.

REM: This market is definitely still hot. Given the high price paid per acre, poor quality of the land, high construction and labour costs it leaves me wondering how much profit is expected, say 15% - 10% - maybe less. It all comes down to how much they can sell the finished product for, apparently the sky is still the limit. Considering the flipping land for huge profit and investors snapping up the presales it seems as though this market has its share of investors selling to investors.