Friday, May 22, 2009

Not much to say this week...

The Canadian banks have been down-graded by Credit Suisse who thinks we still have some fiscal pain ahead.

Japan is in bigger trouble than anyone thought, with a 4% first quarter drop in GDP. That is enormous. Since then the Yen has appreciated against the dollar so expect more of the same, as they are an exporting nation.

The Canadian Dollar has had a nice little run, which I have used to buy some US dollars for trips and shopping. Everyone is abandoning the US Dollar as they think the US government is going have to bail-out companies and issue debt for a long time. They will, but then so will every other government. So I am betting within a year the USD will move much higher once again.

The UK had it's rating put on 'credit watch'. Now some of you may think that it is impossible for a first world sovereign nation to be put on credit watch. It did happen to the UK in the 70's when the IMF had to pull them out of the ditch. However it goes to show you how bad things are.

I do not think we are out of the woods by any means.

I am seeing a slight drop off in sales for this week, and lower prices on the sales. The froth that built right after the big mortgage rate cuts, is diminishing. Folks are beginning to realise that there is no point taking on a $1M asset, loaded with debt, however low the rates....if... there is a good chance you they not be able to make the payments in a year, the asset is no longer appreciating, and they end up having to sell and lose your equity.

What are the rest of you seeing out there?

I am seeing consternation amongst the bears and even the most bullish Realtor bloggers are expressing surprise about the market strength. No surprise at all.

About a year ago, when the market was it's feverish heights, many bears (myself included) estimated that the market was 40-50% ABOVE the affordability level for this city.

Well we were right, it's just that the mechanism of correction wasn't what we expected. We expected housing prices to drop 40-50%. Well as we all know, sales went into free-fall from Oct 2008 and we hit 20 MOI.

Then the Central banks cut rates to near zero. The net result is a 12-15% drop in prices and 30% drop in mortgage payments, which gives us our 40%+. The payments have come down to the affordability level of a year ago.

So am I buying? Not yet. Note above I said the affordability of a year ago. I think we live in a very different world from a year ago. In the interim many large banks in the world have teetered on BK and have been rescued by tax-payer money.

Two of the big three auto makers are moving slowly into bankruptcy, even Toyota has suffered it's first loss in 70 years!

So this is not the same world. I doubt many of you reading this blog will get much in the way of pay raises if you are an employee, or make as much money as last year if you are self-employed.

So the affordability level is actually lower now than last year and I would expect housing to have to correct further. How much further? Well that depends what happens to interest rates. they cant get lower, but they can go up, as is happening in the US now. As rates rise, the prices will have to adjust for that as well as lower earning potential.

Meanwhile I found this sad tale on the Internet. The dirty side of a reckless boom going bust: