Canada ranks in middle on global real estate froth scale

Where Canada stands

Canada ranks "in the middle of the pack" on the global real estate froth scale, Bank of Nova Scotia says in a new look at housing markets around the world.

"The global housing boom which began in the mid- to late-1990s and extended through the mid- to late-2000s was notable in its breadth, strength and longevity," economist Adrienne Warren says, and has taken different paths across different markets. Ms. Warren tracked inflation-adjusted prices in 12 advanced economies. In Japan and Germany, prices declined. In four markets - the United States, Britain, Ireland and Spain - average prices have plunged markedly from their peaks. And in six - Canada, Australia, France, Italy, Sweden and Switzerland - prices remain in record territory or close to it. On average, a cycle of rising prices was 12 years. Italy saw the shortest, at eight years, and Ireland and Sweden the highest at 15. Canada's boom has run for 13 years.

"Based on cumulative price increases since the start of their respective cycles, the U.S. real estate market appears the least overvalued, with average prices having reverted back to mid-1990s levels," Ms. Warren said of the country most cited for the housing crash. She found "little evidence" of marked overvaluation in Switzerland and Italy, at about 30 per cent over the cycle, and counted Ireland, Sweden and Britain as the most overvalued, at between 130 per cent and 150 per cent. "Canada falls in the middle of the pack, with inflation-adjusted average home prices rising 83 per cent since 1998. The relatively smaller cumulative price increase compared with some of the frothiest markets reflects in part a later takeoff. Canada residential real estate boom started several years after many of its counterparts, with the economy still feeling the effects of the deep recession of the early 1990s and a weak labour market recovery through mid-decade. "Canada's housing market has been cooling, though few see a melt down in the works.

According to new projections from the Canadian Real Estate Association today, home sales in Canada are expected to inch up this year and dip next, while prices slip this year and rise in 2013. National numbers in each case are skewed by Ontario and Vancouver, respectively. "Risks to the Canadian economic outlook remain elevated owing to the European sovereign debt quagmire, but the continuation of low interest rates is the silver lining," the group's chief economist, Gregory Klump, said in the new report today. "So long as the European debt crisis is contained and a global economic recession avoided, low interest rates will support Canadian home sales and prices. Recent trends are reassuring, but interest rates remaining low for longer will doubtless keep the Canadian housing market under scrutiny for signs of overheating. "CREA forecast sales will climb 0.3 per cent this year to 458,800 on better demand in Alberta, Saskatchewan and Nova Scotia, but slip by the same percentage, to 457,200, in 2013. However, all provinces but Ontario will see "modest gains" next year.

National average prices have spiked on sales of rich properties in Vancouver, but CREA said that won't likely happen again this year. Thus, the national average is projected to slip 1.1 per cent to $359,100 this year, and rise 0.9 per cent in 2013 to $362,300. Finance Minister Jim Flaherty said today he's still concerned about the condo market, but that housing overall has moderated.

Economists paint rosier view
Canada's finance minister got an upbeat forecast today from private sector economists, who predict his government will have more revenue coming in over the next few years thanks to increased stability in Europe and better-than-expected U.S. growth. It was only a few months ago that the same group of economists were urging Jim Flaherty to pad Ottawa's books with prudence in case the global economy worsened, The Globe and Mail's Bill Curry reports.

China cuts forecast
China has cut its forecast for economic growth for the first time in seven years, though economists don't actually accept the new numbers and aren't rushing to rejig their own projections. Chinese Premier Wen Jiabao unveiled the new growth target today at the opening of the National People's Congress, Carolynne Wheeler reports from Beijing, trimming it to 7.5 per cent from 8 per cent, a move that sparked some concern. Economists say "growth stability" is the primary focus for Beijing, and generally believe the economy will perform above the official target. "Of course, to what extent this means anything sustainable going forward depends upon the success with which Chinese authorities are able to engineer such a soft landing," said Derek Holt and Dov Zigler of Scotia Capital. "In that context, note that Chinese growth has often overshot the 8-per-cent target that has been in place since 2005. In fact, only one year 2008 came in lower than the target as all other years since recorded growth of 9.8 per cent to 11.2 per cent. So much for targets. What it does signal, however, is that market expectations for further policy easing by way of cuts to required reserve ratios and/or fiscal stimulus through large pump-priming outlays should be held to a moderate slant."

Markets eye Greek bond swap
Markets are watching developments in Greece - again - as Athens nears results of the "voluntary" debt swap that could yet again determine its fate. Thursday marks the deadline for private bondholders to agree to the exchange of debt, part of a sweeping plan to to ease its debt crisis. Athens needs 75 per cent to agree, but has targeted 90 per cent. Standard Poor's has already decided Greece is in "selective default" after changing the terms of some payments through what are known as collective action clauses, or CACs. And last week, a key industry body, the International Swaps and Derivatives Association, found Greece had not defaulted. "The worst scenario is one where Greece fails to even meet the threshold for introducing CACs so the whole deal falls apart," said currency strategist Elsa Lignos of RBC in London. "But for CACs to become binding, just 50 per cent of the face value needs to register and of those 2/3 need to consent to the CACs.
Given that Greece holds the voting rights to debt previously held by the [European Central Bank] and is assured co-operation from Greek banks and funds, that is a low threshold to meet. The most likely scenario is take-up that exceeds 75 per cent but doesn't reach the target 90 per cent, with Greece using CACs to force the holdouts. "Several major institutions said today they would agree.
EU to act on board glass ceiling
The European Union is eyeing measures, such as quotas, to increase the number of women on corporate boards. A report by the European Commission released today shows what the group called "limited progress" a year after Justice Minister Viviane Reding urged companies to adopt self-regulatory moves. According to the report, women account for only on in seven directors at Europe's major companies. While that's up marginally from 2010, the EC said, "it would still take more than 40 years to reach a significant gender balance (at least 40 per cent of both sexes) at this rate. "Gender balance at top levels lead to better performance, the group said, and it launched a consultation program as to what measures it could take that will run until May 28. Then it will make a decision.
The true north strong (at least one of us) and free
The idea of Iceland adopting the Canadian dollar isn’t as nutsy as it might seem to some.
Indeed, says Justin Wolfers, a prominent U.S. economist, if Iceland really wants to do it, Canada should go for it. And if we don't, maybe the Aussies will. It also appears there's nothing to stop the Icelanders from doing it on their own, by the way. The suggestion, which has been tossed around in some quarters in Iceland over the past several months, picked up steam late last week when Canada ambassador to the tiny nation, Alan Bones, said Ottawa is open to talking about it if Iceland makes the request. What we know the nature of the final agreement is will depend very much on the expectations of both countries, Mr. Bones told a broadcast interviewer in Iceland. But in a straightforward unilateral adoption of the Canadian dollar by Iceland, where it is clear that there's no input into monetary policy, then we'd be certainly open to discussing the issue. Mr. Bones had actually prepared to take it further, and was planning to deliver a similar message Saturday to a conference on Iceland currency, the krona. But, as The Globe and Mail's Barrie McKenna reported, Canada Foreign Affairs and International Trade Department pulled the plug at the last minute.
Coincidentally, that happened just a few hours after my colleague story was published online, picked up by other media and flashed around the world via Twitter. Canadian officials said Ottawa won't talk about the currencies of other countries (though that didn't seem to be an issue when the G7 intervened to stem a surge in the yen a year ago) and that it wouldn't have been right to make such comments at a political event, in this case one held by Iceland's opposition Progressive Party. I agree it wasn't the venue for it, particularly given that Iceland's government is officially preparing to join the 17-member euro zone, but it does seem clear that someone somewhere has been talking about this. It's highly unlikely that Mr. Bones went rogue. Iceland, of course, was the original poster child of the meltdown, suffering a banking collapse, an economic mess and capital controls.

An independent currency for a country with the population of the size of a decently sized Canadian city was always going to be a problem, said Sebastien Galy, senior currency strategist at SocitGrale. Having that country run a financial bubble while offering very high yield was a recipe for a very rapid rise of a financial empire followed by a catastrophic collapse, with the currency ceasing to have a market at one point. The past few years have been of picking up the broken pieces, and a move to a new currency would help to bring credibility while forcing adjustments in internal prices. Should that new currency be the loonie, as it's known in Canada, which is actually a coin rather than a bill? While both currencies share some commonality with their exposures to energy and commodities, it is a reaction to the government negotiating and preparing for the eventual introduction of the [euro], Mr. Galy said of the weekend discussion in the opposition camp. Neither currency is optimal for this country and it is atug of war between Iceland's European and more independent Nordic roots.

Mr. Wolfers thinks the Australian dollar would be a better fit for Iceland. But from Canada's perspective, it would be a no- brainer,the associate professor of business and public policy at the Wharton School of the University of Pennsylvania told me. Honestly, other countries should compete with Canada for Iceland's business,” said Mr. Wolfers, also a visiting fellow at Princeton, citing Australia in particular. This followed his comments Friday on Twitter, to which Australian MP Andrew Leigh, a former economics professor, responded that, indeed, Iceland would be better off adopting the Aussie dollar. So maybe we can get a competition going. Mr. Wolfers was referring to what is known as seigniorage, which is how Canada could benefit should Iceland actually ever ditch the krona for the loonie. I'm not talking about a currency union here, just Iceland using the loonie.
Here are five things to consider:
1. Seigniorage
This is the biggie, if a bit complex.
Seigniorage is the difference between the cost of printing a currency and its value. As the Bank of Canada explains it, it's the difference between the interest the central bank reaps on a portfolio of government securities, in turn basically the same amount as the value of outstanding bank notes, and what it costs to issue, distribute and replace the bills. On its website, the central bank uses the example of a $20 bill, which has an average lifespan of three years and is the most commonly used. If it invests the proceeds of issuing that note in a government security that yields interest of 5 per cent, the bill yields $1 a year. Producing that bill costs 9 cents. Given the three-year lifespan, it costs an average of 3 cents a year to produce the note. Add 2 cents a year to distribute it, and the annual cost is 5 cents, which means revenue for the central bank of about 95 cents a year for each $20 bill that’s out there. More than $50-billion has been circulating at any given time, though that can and does change.
Generally, the central bank says, it reaps about $2-billion a year. Some is used for general expenses - $366-million in 2009 – and the rest goes to government coffers. Given Iceland's small size its population is just 320,000 and the fact that its people have embraced electronic banking, we're not talking about a seigniorage windfall here. But Canada's Finance Minister Jim Flaherty is looking to get his hands on whatever he can. Printing money is a good thing for Canada, Mr. Wolfers said. Every dollar in circulation is on the debit side of the central bank's balance sheet, and they're effectively borrowing from the Icelanders at a zero-per-cent interest rate.

So if there are no strings attached, why not? Or, as Mr. Wolfers put it, referring to Iceland, as long as you're a bastard, it's all profit.
2. A stable currency
Iceland could of course benefit from a devalued currency. Instead it would get a strong, stable currency that has been something of a haven during this post-crisis period of uncertainty. While strong, exporters at least know what to expect. Consider, too, that the Canadian dollar is liquid. The krona was "blasted through smithereens and very few banks can trade [it] in anything else than very small amounts," Mr. Galy noted. The dollar has been hovering around par with its U.S. counterpart and is expected to remain there, at least through the end of this year.
I'm not sure Ontario Premier Dalton McGuinty would agree, but Mr. Galy believes that the Bank of Canada has held interest rates below where they should be to hold the loonie down and give exporters more time to adjust to the currencys strength. So that's at least something for Iceland if you take that view. This soft approach means that capital may be increasingly misallocated at too low a rate (e.g. potentially housing),” he said. The more German approach, familiar to many German communities in Canada, is to get down and fix the productivity issue, irrespective of any short-term pain. There is a fine balance between the easy and hard way, we must all tackle whether in Iceland, Europe or Canada.”
3. Respected central bank
Iceland would of course have no say in monetary policy, but it would have a currency overseen by a very strong central bank and governor, who led Canada out of the recession admirably. Mark Carney is also respected on the global stage, having recently been named to head up the Financial Stability Board. "Dear Canada: If Iceland wants you rather than their own inept central bank to earn their seigniorage, accept the deal," Mr. Wolfers said on Twitter.

4. Fiscal, economic stability
Iceland has no reputation in the wake of its banking collapse. Who would you prefer at that point, a euro zone crippled by recession and a two-year-old debt crisis, or Canada? With Canada, you get a stable, if lukewarm, economic outlook, a government that’s still rated triple-A, and a fiscal standing to die for (if you're Greece or Portugal). And, we can count.

5. Our glowing hearts
For Iceland, do not underestimate friendship in this post-crisis era of currency manipulation and mounting trade tensions. We're a wonderful people, they're a wonderful people. We've got a beautiful country, they've got a beautiful country. True, it gets cold in Canada in the winter, but remember we're talking about Iceland. And surely we can forgive them for Bjork. (A colleague quipped today that he wondered whether Bjprk could qualify as Canadian content, or Cancon, should the adoption of the loonie ever take place. So he asked about it, even though it began as a joke. She wouldn't. She'd need to meet two of four criteria, even if totally financed with Canadian dollars. As in, she'd hypothetically have to cover a Tragically Hip number in Canada, or her track would have to be produced by a Canadian like Daniel Lanois. Without that, the Icelandic star is still Icelandic under Canada's rules.
What to watch for this week

The Bank of Canada is back at the table with its policy meeting of the year and an announcement Thursday. No change is expected in the central bank's benchmark rate of 1 per cent. "With investors paring the odds of both a U.S. recession and euro zone train wreck, the odds of an interim bank rate cut have not surprisingly dwindled," said Peter Buchanan of CIBC World Markets. "That said, the last thing Governor Carney wants is to add to the currency’s tailwinds and manufacturers' competitive woes, with the loonie back at five-month highs on triple-digit crude. Look for a cautious statement consequently that stresses continuing global financial risks along with the ongoing dangers of an overvalued currency. "The European Central Bank and Bank of England also meet Thursday. A day later, markets will turn their attention to the key issue of unemployment in both Canada and the United States.

Economists largely expect Statistics Canada's jobs report to show about 15,000 jobs were created in February, and the unemployment rate remained stuck at 7.6 per cent. In the United States, where the labour market has made surprising gains recently, observers expect to see a reading of more than 200,000 jobs, with the jobless rate holding at 8.3 per cent. "We don't anticipate a further rise in the jobless rate, but we also don’t look for a break from the recent lacklustre pace of job growth either," deputy chief economist Douglas Porter of BMO Nesbitt Burns said of the Canadian report. "Mild weather will support some sectors (retail, construction, transportation), but could weigh on others (recreation)." In the markets, earnings are slowing down, but some biggies remain, notably Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Canadian Natural Resources Ltd., Dorel Industries Inc. and Viterra Inc., among others, which report throughout the week.
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