Monday, May 31, 2010


The rich return

Luxury shopping is making a comeback
Daniel Gross,
Published: Monday, May 31, 2010

Are the rich coming back? Just in time for Sex and the City 2, there are signs that the orgy of luxury shopping that made the latter years of the credit bubble so much fun are back.

Item 1: fancy food. On May 20, "Breaking Views" columnist Rob Cox said that "the corridors of wealth and finance are alive with new optimism." His main tell? Whole Foods reported a solid quarter, "the best we have reported in several years," as CEO John Mackey put it. Same-store sales were up 8.6 percent, and Whole Foods boosted its outlook for the whole year. The stock price has doubled in the last year.

Item 2: fancy homes. "Luxury Sales Bounce Back," screams the headline in a Friday Wall Street Journal article about high-end residential properties. In both San Francisco and Manhattan, the Journal reported, the number of homes that sold for more than US$2 million in the first quarter of 2010-49 and 402, respectively-was higher than the comparable 2005 figures.

Item 3: fancy stuff. On Thursday, Tiffany reported an excellent first quarter, with global sales up 22%. Much of the growth was driven by Americans' newfound discovery of the allure of the pale blue boxes-and the overpriced metal bits that are stuffed inside them. "Sales in the New York flagship store rose 26% and comparable Americas' branch store sales increased 13%. Internet and catalog sales in the Americas rose 23%." A few blocks south on Fifth Avenue, Saks reported that after seven straight quarters of decline, same-store sales finally rose in first-quarter results, up 6.1%. Total sales were US$667-million. At Nordstrom, same-stores sales in the first quarter were up 12% from the first quarter of 2009, and net sales came in at US$1.99 billion, up 17% from the year-before quarter.

These data all point to signs that the rich may be back. But back from what? The Whole Foods-$2 million condo-Tiffany-Saks-Nordstrom crowd has experienced a reflation in assets, net worths, and egos. (If sales of Botox and cosmetic surgery start to rise, this reflation will be evident elsewhere.) But the same-store sales figures may be somewhat misleading. The truly rich never went away, even during the depths of the recession. And these big luxury brands don't just cater to billionaires and hedge-fund magnates-there just aren't enough of them to support hundreds of stores. No, the shoppers who enabled mass luxury marketers to thrive were the not-quite-rich, the coastal $250,000-plus earners who deny they're rich, the haute bourgeoisie who frequently act rich, and the not-at-all-rich who used home equity and credit cards to fake it at certain stores. While they may have emerged from their stunned, locked-down stupor, these consumers are not at full strength.

Tiffany's sales were $633.6 million in the first quarter, about what they were in the first quarter of 2007. At Saks, sales in the first quarter of 2010 were still down 23% from the first quarter of 2008. Neiman-Marcus reported that sales in its most recent quarter bounced back, but they were still 19 percent below the sales figure from the 2008 first quarter. And so on. For home values and high-end retailers-as for the stock market-2007's results may represent a high-water mark that won't be surpassed for several years.

In order to return to full financial health, these companies will have to convince their core audience of the anxious affluent that it's OK to blow US$130 on organic vegetables or US$475 on a pair of shoes. And while the economy is growing, many of the affluent are still anxious-about their volatile retirement investments, about job security, and about home values. They're feeling much better than they were in 2009. But it may take another year or two of solid growth, market gains, and healthy bonuses before they start to party like it's 2007.

Photo By: Minimalist1


Canadian growth best in ten years
Paul Vieira, Financial Post
Published: Monday, May 31, 2010

The Canadian economy posted better-than-expected growth in the first three months of 2010, marking the best quarterly performance in over a decade, Statistics Canada reported Monday -- and all but cementing the likelihood of a Bank of Canada rate hike this week.

Strong domestic demand and a robust manufacturing sector helped the Canadian economy record annualized growth of 6.1% for the first quarter, the strongest three-month showing since 1999. This followed a stellar 2009 fourth-quarter performance, of 4.9% annualized (although revised down from 5%).

The expectation was for a 5.8% expansion for the first quarter. The 6.1% gain in output marks the third straight quarter of positive growth after the recession, which lasted three quarters. Further, the first-quarter result is just over double the growth the U.S. economy produced for the first three months of 2010, of 3%.

"While there are some questions on the sustainability of the rebound, there is simply no question that the early stages of Canada's recovery exceeded even the most optimistic expectations," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Analysts suggest this pace of growth can't last. However, they said the strong handoff from first quarter to second quarter likely means annualized growth of roughly 3.5% to 4% for the three-month period ending June 30.The first-quarter bump was helped by a stronger-than-expect March result, of a gain of 0.6%.

In early trading, the Canadian dollar had gained nearly a cent, to trade in the US95.9¢ range.

The consensus as of late last week was that the Bank of Canada would raise its key benchmark rate on Tuesday, by 25 basis points to 0.50%, given the stronger-than-expected domestic economy. The first-quarter result all but cements that view.

The solid gains over the fourth quarter of 2009 and the start of 2010 "provide strong evidence" and the near-zero interest rates, combined with a dollop of fiscal stimulus, "have helped pull the Canadian economy out of its recent recession," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "With the monthly numbers showing strong momentum late in the first quarter, the Bank of Canada will take reassurance that this strength is likely to be sustained near term. This suggests an environment where the Bank of Canada will continue to withdraw stimulus from the system."

There was a belief the central bank could hike its target rate by 50 basis, but market uncertainty due to developments in Europe might cause the central bank to hold back.

Production grew faster in the first quarter of 2010 than in the fourth quarter of 2009, and inventory levels rose after being drawn down in all four quarters of 2009. Residential investment increased for a fourth consecutive quarter, as did consumer spending on goods and services. Export and import volumes both rose for a third consecutive quarter, with growth in imports outpacing growth in exports in the first quarter.

First-quarter strength was broad-based with domestic demand at the top of the list. Consumer spending, up 4.4% annualized, and residential investment, up 23.6%, contributed the most to economic growth. Meanwhile, business investment grew by 0.9% following a 9.8% decline in the previous quarter, led by a 7.6% gain in investment in machinery and equipment. Economists at Toronto-Dominion Bank note that non-residential construction is one component of GDP yet to head down the road of recovery.

The goods-producing component of the economy expanded 2.7% in the first quarter, led by a 4.2% gain by manufacturing. The manufacturing sector was able to post this gain even though the Canadian dollar traded mostly above the US90¢ mark in early 2010.

This is the latest in a string of Canadian economic data that have been consistently surprised to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target.

The sterling fundamentals prompted the Bank of Canada last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July.

Photo By: JoLoLog

Friday, May 21, 2010


Necessity drives 'family reunion' real estate deals
Multi-generational homes 'a very strong trend'
By Mario Toneguzzi,
Calgary Herald
May 21, 2010

Family reunions are taking on new meaning in the real estate market, according to a recent survey by Coldwell Banker Real Estate LLC.

A survey of its real estate professionals in both Canada and the United States found that a large percentage have noticed in the past year an increase in homebuyers looking for a property to accommodate more than one generation of their family.

Overall, 37 per cent of respondents said they have seen an increased demand for multi-generational homes, but in Canada the number was 45 per cent. And in Canada, the real estate professionals cited health-care issues (52 per cent) as the top reason why people would move into a house with other generations of their family.

Financial drivers were second at 45 per cent, while less than one per cent cited a strong family bond as the main factor.

John Geha, president of Coldwell Banker Canada, who was visiting Calgary, said one of the main reasons for the trend is the aging population of baby boomers.

"Throughout the world, multiple cultures really bring the family back home and are taking care of each other, whether it's the child taking care of the parents or the child taking care of the grandparents," said Geha. "But also you have the grandparents helping out because you have a dual-income household with young children and it makes their concerns of taking care of their children a little more relaxed because they have that family member there."

Another factor, of course, is the cost of housing and the loss of retirement funds some people may have felt over the financial market meltdown in the past year.

"Now they're able to pool their resources . . . and bring their families back home," said Geha, adding that he has talked to a number of contractors and builders who are making special arrangements in homes to accommodate older people.

"It is becoming a trend, a very strong trend," he said.

The increased financial costs in home ownership is evident in the Calgary market. According to the website of Mike Fotiou, of First Place Realty, the average MLS sale price of a single-family home in Calgary month-to-date until Wednesday was $486,064 which is up from $460,378 for the month of April and up from $436,427 in May 2009.

The average MLS sale price of a condo in Calgary month-to-date is $310,709, up from $289, 588 in April and $275,212 in May 2009.

Coldwell Banker conducted an online real estate survey on trends regarding multi-generational home buyers and sellers in January. The survey yielded responses from 2,360 Coldwell Banker real estate professionals across the U.S. A separate survey of Coldwell Banker real estate brokers from over 40 markets across Canada in April identified similar trends in the Canadian market.

Thursday, May 20, 2010


Housing market expected to moderate this year and next: CMHC
Financial Post
Published: Wednesday, May 19, 2010

OTTAWA -- Canada's housing market is expected to ease in 2010 and 2011 as the market returns to more balanced conditions, Canada Mortgage and Housing Corporation said Wednesday.

"Canadian housing markets have recovered from the low levels posted in early 2009," Bob Dugan, chief economist for CMHC, said in a release.

"Moving forward, housing starts will moderate as activity becomes more in-line with long term demographic fundamentals. New measures for government-backed mortgage insurance introduced by the government of Canada that took effect on April 19, 2010 will continue to support the long-term stability of Canada's housing market."

The mortgage insurer said in its second quarter market outlook it expects housing starts in 2010 to be in a range of 166,900 to 199,600 units with a "point forecast" of 182,000 units.

In 2011, it expects starts to be in a range of 148,600 to 208,800 units with a forecast of 179,600 units.

Resales, meanwhile, are forecast in 2010 to be in a range of 484,000 to 513,300 units with a forecast of 497,300 units. In 2011, they are forecast to be in a range of 443,500 to 504,900 units with a forecast of 473,500 units.

Dugan said the existing home market will move toward balanced conditions over the next two years as inventory levels increase, a trend already occurring according to figures released Monday by the Canadian Real Estate Association, which showed April inventories rising to record levels.

The market was influenced in late 2009 and early 2010 by pent-up demand and record low borrowing cost, Dugan said.

That resulted in what many feared was an overheated housing market, driving average Multiple Listings Service prices up almost 20 per cent in 2009.

"Once this demand is exhausted, and as mortgage rates gradually rise, the pace of activity in the resale market will ease," Dugan said.

Photo By: PatchworkPottery

Tuesday, May 11, 2010


Invest in real estate and in your kids
Garry Marr, Financial Post
Published: Friday, May 07, 2010

Here's one way to tackle the red-hot Canadian housing market: Get someone to buy you a home.

That someone would be your parents. According to a new survey from TD Canada Trust, 10% of Canadians are considering buying a condominium for their adult children. A year ago, only 5% of parents thought about buying the kids a condo.

"It could be something that the parents are looking at as a long-term source of income, letting their children live it in for now," says Chris Wisniewski, associate vice-president of real estate and secured lending with TD.

It could also be that parents know condominium prices, like detached homes, have climbed to unprecedented levels, making it difficult for adult children to come up with a minimum 5% down payment, let alone the 20% needed to avoid costly mortgage default insurance.

Toronto condo research firm Urbanation Inc. says the average existing condominium in the city sold for $331,000 in the first quarter of 2010. Based on an average $369-per-square-foot price, that's a 900-square-foot unit.

For a new one, prices averaged $443 per square foot in the first quarter, so about $400,000 for that same-sized condo.

Ms. Wisniewski says low interest rates are convincing parents to step up and buy their children homes. The condominium represents an attractive alternative to those parents because the costs are stable.

"They know what the maintenance costs will be," she says. "[Parents] are thinking, ‘I'm not worried my children are too young to accept the responsibilities of home ownership if I set them up in an apartment. They don't have to recognize the responsibilities of maintenance in an apartment.' "

Parents might also see a condominium as a way to get their kids to start a family. The survey found 36% of Canadians are willing to raise families in a condo.

"One of the reasons for that is affordability," says Ms. Wisniewski. "Where are the new condominiums being built? They are being integrated in really nice existing neighbourhoods with all the infrastructure and all the schools and amenities."

Brian Johnston, president of developer Monarch Corp.'s Canadian division, says he doubts families will ever be integrated into the condominium stock, but does agrees with the premise that parents are helping to buy housing for their children. He says parents often want to keep children close to them so they'll chip in for a condominium in a nearby neighbourhood.

"How do we know they're helping out? They tell us when they are writing the cheques for the deposit," Mr. Johnston says.

Mr. Johnston said when it comes to recent immigrants to Canada, there is "lots of help" from family members to get that first home. "Condominiums are not inexpensive and they're going to need that help, particularly if the younger ones have not had time to build up their finances."

The builder has his own children and, based on today's prices, he figures he's going to have to lend a helping hand. "I don't expect them to be able to buy a condo ... before they are 30. That is just part of the deal [for parents]," says Mr. Johnston.

It's not like Baby Boomers don't have the cash. There have been endless studies that suggest the Boomers are set to inherit billions of dollars in the coming years from their parents.

Craig Alexander, deputy chief economist with TD Bank Financial Group, says there is no hard data to suggest how much parents are helping children, but they certainly have the financial capacity to lend a hand.

Canadians have $1.5-trillion invested in stocks and mutual funds with $500-billion of that figure in capital gains.

"The generation before the Baby Boomers were big savers and, as a consequence, there is a very large income transfer going to take place over time," says Mr. Alexander, adding it makes sense that some of that money is going to end up in housing and real estate.

For first-time buyers facing rising rates and increasing prices, the helping hand couldn't come at a better time - just ahead of tighter mortgage financing rules. Most of them probably hope their folks go from "considering" buying a condo to actually doing it.

Photo By: Remodeleze

Thursday, May 6, 2010


Time to lock in that mortgage rate?
Andrew Allentuck, Financial Post
Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower's dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. "The test is liquidity and risk tolerance," says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. "People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases."

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. "There is more room for rates to go up than down," Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. "Over the long run, homeowners really do pay extra for fixed rate mortgages," they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. "The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage."

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. "First time buyers tend to pay close attention to the cost of the mortgage," says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

"The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise."

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now."

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.

Photo By: Philipp Klinger