Post by kelvin on Sept 24, 2008 22:04:21 GMT -5
www.reportonbusiness.com/servlet/story/RTGAM.20080924.wmortgage0924/BNStory/Business/?cid=al_gam_mostdiscuss
The Canadian Press
September 24, 2008 at 6:58 PM EDT
TORONTO — Merrill Lynch Canada Inc. is challenging the prevailing view that Canada's housing and mortgage markets are more stable than their U.S. counterparts, warning that households in this country are so indebted that it's only a matter of time before we see a major downturn here as well.
In a report issued Wednesday, Merrill Lynch Canada economists said many Canadian households are more financially overextended than their counterparts in the United States or Britain.
They said it's only a matter of time before the “tipping point” is reached and the housing and credit markets crack in Canada.
The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view.
Prime Minister Stephen Harper, in British Columbia for the federal election, responded to the investment firm's warnings by repeating his assurances that Canada's economy is in good shape.
“I think our housing market is in strong position [and] consumer markets, as well, are stronger in Canada than the U.S. and the position taken by our financial institutions.”
“Of course, we have seen that this market has somewhat weakened in the last 12 months but we will not see such a situation here as in the U.S.”
Commenting on the warning Wednesday, NDP Leader Jack Layton renewed his call for a complete “top-to-bottom” review of how Canadian financial institutions assess risk, bundle investments and protect Canadians' savings.
Mr. Layton said the NDP was the first party to raise the alarm about rising consumer debt in Canada, and added that the NDP would, if elected government, take steps to control interest on that debt.
“The families of Canada became worried a long time before Merrill Lynch began to notice what was going on,” Mr. Layton said, “because they couldn't pay their bills every month and they were worried about their savings.”
Liberal Leader Stéphane Dion charged that Conservative Leader Stephen Harper “did nothing to improve the situation” for this country's reduced savings rate.
Mr. Dion attacked the fact that one of the Tory government's centerpiece economic policies was to cut the goods and services tax at the cost of $12-billion in foregone revenue, a measure he said encourages spending rather than saving.
“[Mr. Harper's] main policy in the last two years has been … to cut the GST instead of cutting income taxes,” the Liberal Leader said during an election stop in Winnipeg.
“That means for the people to benefit from the [GST] tax cut they needed to purchase more – to spend more for consumptions at a time when the saving is at a record low.”
An expanding financial crisis that has been heating up in the United States for more than a year, came to a full boil last week with the near-collapse of several major American investment banks, including Merrill Lynch & Co. Inc. and insurance giant American International Group Inc.
U.S. Treasury Secretary Henry Paulson, himself a former senior Wall Street investment banker, has been feverishly pushing the White House and Congress to accept a $700-billion (U.S.) taxpayer-funded rescue plan.
Meanwhile, the National Association of Realtors reported Wednesday that the U.S. median sales price in August fell 9.5 per cent to $203,100, the largest decline on records dating to 1999.
Many economists have said repeatedly that Canada's housing and banking sectors are much more stable than their U.S. counterparts and is unlikely to crash — since it didn't spike in recent years because of many differences between the two countries..
Benjamin Tal, an economist with CIBC who has been following closely the ups and downs of the housing industry, said Wednesday he sees no “trigger” threatening Canada's housing and mortgage market.
“To see a crash in the housing market you need a trigger,” Mr. Tal said.
“The trigger in 1989-1990 was extremely high interest rates. The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada.”
However, Merrill Lynch Canada — whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the U.S. housing and mortgage meltdown — said Canadians should be wary.
Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 — meaning they're carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 — just before the subprime mortgage crisis erupted.
“These data imply that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle,” the Merrill report says.
“We're just now starting to see house prices fall in Canada, and sharp rises in unsold home inventories increasingly imply that this will not be a transitory phenomenon ... From this perspective, the absence of a Canadian credit crunch to date may be cause for concern, not comfort,” the report says.
The prevailing view, however, is that Canada's lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system.
In addition, many observers argue that Canadian residential properties are, by and large, not overvalued — considering the strength of regional economies in resource-rich provinces.
Mr. Tal agreed there's a high level of debt in Canada but added “the distribution of debt in Canada is much better than in the U.S.”
“There was really a lot of high-risk debt in the U.S. You don't see this in Canada,” he said.
Gregory Klump, chief economist with Canadian Mortgage and Housing Corp., said there would need to be a spike in interest rates or massive layoffs before the housing market would take a tumble Right now, he said, “we have a stable labour market” and interest rates are low.
“There's no distress sales in Canada, not like in the States.”
In Calgary and Edmonton, where house prices have been falling recently after reaching astronomical heights, he said, “the market is beginning to stabilize.”
Mr. Klump said Merrill's warning on Wednesday “is consistent with the viewpoint they've had for the last year, but it hasn't happened.”
James Marple, an economist at Toronto-Dominion Bank, said housing affordability — which reflects not only the purchase price but cost of ownership, including debt payments — has not declined in this country like it has in the United States.
As well, Canada has not had the “kind of glut of housing supply across the country” that would lead to the massive correction experienced in the U.S., Mr. Marple said.
BMO economist Douglas Porter said “it's quite a stretch” for Merrill Lynch to say that the Canadian market is going to face the same kind of deep downturn as the U.S.
However, he said, there are legitimate reasons “to be cautious on the housing market outlook” in this country.
“I don't think it's going too far out on a limb to say that prices could recede a bit in many cities” but nothing like in the United States.
With a report from the Globe's Omar El Akkad and Steven Chase
The Canadian Press
September 24, 2008 at 6:58 PM EDT
TORONTO — Merrill Lynch Canada Inc. is challenging the prevailing view that Canada's housing and mortgage markets are more stable than their U.S. counterparts, warning that households in this country are so indebted that it's only a matter of time before we see a major downturn here as well.
In a report issued Wednesday, Merrill Lynch Canada economists said many Canadian households are more financially overextended than their counterparts in the United States or Britain.
They said it's only a matter of time before the “tipping point” is reached and the housing and credit markets crack in Canada.
The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view.
Prime Minister Stephen Harper, in British Columbia for the federal election, responded to the investment firm's warnings by repeating his assurances that Canada's economy is in good shape.
“I think our housing market is in strong position [and] consumer markets, as well, are stronger in Canada than the U.S. and the position taken by our financial institutions.”
“Of course, we have seen that this market has somewhat weakened in the last 12 months but we will not see such a situation here as in the U.S.”
Commenting on the warning Wednesday, NDP Leader Jack Layton renewed his call for a complete “top-to-bottom” review of how Canadian financial institutions assess risk, bundle investments and protect Canadians' savings.
Mr. Layton said the NDP was the first party to raise the alarm about rising consumer debt in Canada, and added that the NDP would, if elected government, take steps to control interest on that debt.
“The families of Canada became worried a long time before Merrill Lynch began to notice what was going on,” Mr. Layton said, “because they couldn't pay their bills every month and they were worried about their savings.”
Liberal Leader Stéphane Dion charged that Conservative Leader Stephen Harper “did nothing to improve the situation” for this country's reduced savings rate.
Mr. Dion attacked the fact that one of the Tory government's centerpiece economic policies was to cut the goods and services tax at the cost of $12-billion in foregone revenue, a measure he said encourages spending rather than saving.
“[Mr. Harper's] main policy in the last two years has been … to cut the GST instead of cutting income taxes,” the Liberal Leader said during an election stop in Winnipeg.
“That means for the people to benefit from the [GST] tax cut they needed to purchase more – to spend more for consumptions at a time when the saving is at a record low.”
An expanding financial crisis that has been heating up in the United States for more than a year, came to a full boil last week with the near-collapse of several major American investment banks, including Merrill Lynch & Co. Inc. and insurance giant American International Group Inc.
U.S. Treasury Secretary Henry Paulson, himself a former senior Wall Street investment banker, has been feverishly pushing the White House and Congress to accept a $700-billion (U.S.) taxpayer-funded rescue plan.
Meanwhile, the National Association of Realtors reported Wednesday that the U.S. median sales price in August fell 9.5 per cent to $203,100, the largest decline on records dating to 1999.
Many economists have said repeatedly that Canada's housing and banking sectors are much more stable than their U.S. counterparts and is unlikely to crash — since it didn't spike in recent years because of many differences between the two countries..
Benjamin Tal, an economist with CIBC who has been following closely the ups and downs of the housing industry, said Wednesday he sees no “trigger” threatening Canada's housing and mortgage market.
“To see a crash in the housing market you need a trigger,” Mr. Tal said.
“The trigger in 1989-1990 was extremely high interest rates. The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada.”
However, Merrill Lynch Canada — whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the U.S. housing and mortgage meltdown — said Canadians should be wary.
Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 — meaning they're carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 — just before the subprime mortgage crisis erupted.
“These data imply that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle,” the Merrill report says.
“We're just now starting to see house prices fall in Canada, and sharp rises in unsold home inventories increasingly imply that this will not be a transitory phenomenon ... From this perspective, the absence of a Canadian credit crunch to date may be cause for concern, not comfort,” the report says.
The prevailing view, however, is that Canada's lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system.
In addition, many observers argue that Canadian residential properties are, by and large, not overvalued — considering the strength of regional economies in resource-rich provinces.
Mr. Tal agreed there's a high level of debt in Canada but added “the distribution of debt in Canada is much better than in the U.S.”
“There was really a lot of high-risk debt in the U.S. You don't see this in Canada,” he said.
Gregory Klump, chief economist with Canadian Mortgage and Housing Corp., said there would need to be a spike in interest rates or massive layoffs before the housing market would take a tumble Right now, he said, “we have a stable labour market” and interest rates are low.
“There's no distress sales in Canada, not like in the States.”
In Calgary and Edmonton, where house prices have been falling recently after reaching astronomical heights, he said, “the market is beginning to stabilize.”
Mr. Klump said Merrill's warning on Wednesday “is consistent with the viewpoint they've had for the last year, but it hasn't happened.”
James Marple, an economist at Toronto-Dominion Bank, said housing affordability — which reflects not only the purchase price but cost of ownership, including debt payments — has not declined in this country like it has in the United States.
As well, Canada has not had the “kind of glut of housing supply across the country” that would lead to the massive correction experienced in the U.S., Mr. Marple said.
BMO economist Douglas Porter said “it's quite a stretch” for Merrill Lynch to say that the Canadian market is going to face the same kind of deep downturn as the U.S.
However, he said, there are legitimate reasons “to be cautious on the housing market outlook” in this country.
“I don't think it's going too far out on a limb to say that prices could recede a bit in many cities” but nothing like in the United States.
With a report from the Globe's Omar El Akkad and Steven Chase