Rising interest rates in the U.S. could bring economic downturn south of the border

Malcolm Morrison
Sun

The Canadian investor has had it pretty good over the last few years, with the Toronto market running up more than 20 per cent last year and another eight per cent so far in 2006.

It’s all too easy to become complacent in such environment, but plenty of worries remain.

For example, rising interest rates in the United States could threaten a soft landing for the slowing housing market, possibly sparking an economic downturn south of the border.

And then there are looming geopolitical worries centred on Iran, which cast even more dire shadows across the global fiscal landscape.

“I do regard the potential for conflict with Iran as the single biggest risk to the global economic outlook at this point,” said BMO Nesbitt Burns deputy chief economist Doug Porter.

“Even if there’s only a one-per-cent chance of something happening between Iran and the rest of the world, the possible outcomes are so serious that even a one-per-cent chance is worth paying attention to.”

The country continues to defy orders from the United Nations Security Council to suspend enrichment of uranium, a process that can produce fuel for nuclear reactors or material for nuclear warheads. Iran has rejected the demand, arguing it only wants to harness the radioactive material for nuclear energy.

Western countries are skeptical about the claim and the U.S. has pointedly said all options are on the table to make Iran comply — including a military solution.

The big worry is that a military confrontation with Iran aimed

at destroying its nuclear

capabilities — or setting them back for many years — would result in a big slowdown in

global growth sparked by much higher oil prices.

“At the very least, there would be a huge risk premium attached to all oil prices and there is some talk of oil getting above $100 US a barrel, which I think is quite reasonable,” added Porter.

“It’s as good an assumption as any other, given the circumstances.”

While $100 US a barrel oil may not necessarily knock the economy into recession, “it would be

a fairly significant adjustment and upheaval in financial markets with equities getting hit pretty hard and ultimately some of

the commodity currencies like the Canadian dollar getting knocked down quite badly as well,” observed John Johnston, chief strategist, The Harbour Group at RBC Dominion Securities.

Given the economic shock that a military strike on Iran could have on the global economy, it behooves investors to pay attention to what’s in their portfolio and be prepared to move holdings into more defensive sectors if the standoff seriously deteriorates.

Getting defensive means lowering overall exposure to equities, less exposure to cyclical stocks because resource stocks could suffer badly in a global downturn.

Also: “I would be particularly concerned about anything related to the consumer — consumer weighted stocks, I think, would suffer,” said Porter.

Traditional defensives like financial stocks and utilities that have solid dividends would also be a good bet.

But you might also want to consider bailing out of equities entirely by placing money into a treasury bill fund or short-term bonds.

“You would not necessarily do badly because it’s probable that rates would spike up simply because of the necessity of protecting the U.S. dollar through this disruption,” said Gavin Graham, chief investment officer, Guardian Group of Funds.

“There would probably be a flight to safety so you might want to be in short government bonds because they’re yielding 4.5, 4.9 per cent in the States, four per cent in Canada.”

Gold, on the other hand, could be an iffy hedge.

“Gold hasn’t really been exactly behaving as the textbooks would say in recent years,” said Porter.

“It hasn’t always done very well after crises and it’s been very strong even at a time when global inflation has been quite low in the last couple of years.”

And while you would want to lower your overall equity exposure if it looked like conflict was getting likely, some analysts say you would certainly want to make sure you aren’t underweight in the resource sector.

“Resources are your anchor to windward,” said Graham. “Don’t be underweight in resources, it’s worked for the last few years, it’s going to work for the next few years even if everything goes right on the political front in the Middle East and Russia and Peru. [There will still be] that Asian demand and you have supply constraints.”

Johnston said another reason to think defensively besides growing geopolitical risk is where we are in the earnings cycle right now.

“Earnings are still going up, but the growth rates are coming down,” he said.

“You take that and the high level of complacency in the markets and you add geopolitical risk that may be getting more intense, it is an environment where you need to take on a more defensive posture.”

Johnston added that “it’s probably still a bit early from our perspective to be discussing what happens in the case of a military option being used” against Iran.

Finance Minister tells critics $800m funds services

Ian Bailey
Province

CAROLE TAYLOR

The B.C. government is making too much money from the property-transfer tax to consider real-estate industry requests to kill or reduce it, Finance Minister Carole Taylor says.

At best, Taylor is suggesting organizations such as the B.C. Real Estate Association, the latest to pitch reform, keep making their case leading up to next year’s B.C. budget.

B.C.’s red-hot housing market has turned the tax on home and condo sales into a moneymaker for the government worth $800 million in 2005-2006.

It’s forecast to bring in $750 million this fiscal year, declining to $725 million and $700 million through to 2009.

“Those dollars are pretty important dollars when you’re thinking about all of the requirements and needs of government,” said Taylor.

The tax has the government charging one per cent on the first $200,000 of value for a property and two per cent on the subsequent balance.

The real-estate association this week called on the B.C. Liberals to reduce or eliminate the tax, noting that its revenues since 2001 have helped balance budgets and enrich public coffers.

But Taylor said no adjustments are planned.

“I understand their reasons for wishing to not have this transfer tax,” she said. “But when you’re talking about $700 million on the budget, the minister of finance has to say, ‘If I don’t have that revenue coming in, what other spending will I cut?'” Taylor told The Province.

“We will look at it again this year and make a judgment as to whether or not it should be changed in any way, whether that’s an advisable thing to do or if it’s an affordable thing to do.”

Dave Barclay, president of the real-estate association, admitted the tax is “not a deal killer” in real-estate purchases.

“As you can see, real-estate sales are great. There’s lots of things happening. What we’re trying to do is make sure that we make things as affordable as we can.”

Jenny Kwan, finance critic for the NDP, said her party supports a review of the tax as part of a broader discussion on making home ownership more affordable in B.C.’s hot housing market.

© The Vancouver Province 2006

Realtors want threshold for two-per-cent levy raised to $300,000

Bruce Constantineau
Sun

B.C. realtors are urging the provincial government to reduce or eliminate the Property Transfer Tax to make housing more affordable throughout the province.

“If they won’t eliminate it altogether, which would be ideal, they could at least raise the threshold, which would help,” British Columbia Real Estate Association president Dave Barclay said in an interview.

The PTT amounts to one per cent of the first $200,000 of a property’s value and two per cent beyond that amount. Barclay thinks the two-per-cent levy should not kick in until the $300,000 mark.

He said overflowing PTT revenues have helped the provincial government balance four successive budgets, noting that $432 million of PTT revenue was forecast for the 2004-2005 fiscal year but the government actually took in $604 million due to surging real estate sales. Barclay said future surpluses should be used to help people find appropriate purchase or rental housing solutions.

“We’d like to sit down and brainstorm with the government as to how that money could best be put to use,” he said.

The average price of a residential property sold in British Columbia last month was about $383,600 — a 20-per-cent increase in the past year.

Barclay said realtors also want the province to push the federal government for more tax incentives for builders, which would result in the construction of more housing units.

He also said federal changes allowing capital gains rollovers for small-scale investors could result in rental apartment sellers re-investing their profits into new rental housing units.

© The Vancouver Sun 2006

Real-estate expert warns rates may hit record levels by Olympics

Susan Lazaruk
Province

Realtor Bob Laurie says downtown Vancouver is being ‘taken over by residential real estate.’

A shortage of new office space in downtown Vancouver will drive rental prices to record heights by the time of the 2010 Olympics, a real-estate developer told the Vancouver Board of Trade yesterday.

“In the next five years, we’re going to see record-setting rental rates that we’re not used to seeing in this area,” said Norm Taylor, who specializes in office leasing for Colliers International.

He told the forum on the future of downtown Vancouver that there are no buildings, now or planned, that could provide a large corporation with continuous office space.

The only new office tower, Phase II of the Bentall 5 office building now in construction, is already 95-per-cent pre-leased, said Taylor.

He said the shortage coincides with a trend by corporations to move headquarters downtown to make jobs more attractive to employees who commute by mass transit.

At the same time, residential construction downtown has boomed to the point that the city has put a stop to more condo projects.

The forum also heard that jobs are growing faster in other cities in the Lower Mainland, particularly in communities south of the Fraser River, where already 30 per cent of the population lives.

The downtown Vancouver condo boom has raised fears of the “Whistlerization” of Vancouver, but senior city planner Ronda Howard said growth and diversity of jobs in what she called Vancouver’s “metro core,” which includes Vancouver’s east side, shows that isn’t a concern.

Jobs increased in the core since 1971 in professional/commercial services and in health/education/public administration, while decreasing in retail and industrial.

The fastest-growing sectors were computer services, law offices, accountants, education and training, arts and entertainment and personal services (such as laundry services and photofinishing), a city study found.

“Some are worrying that we are going to become a resort city but this shows a diversity,” said Howard.

The study shows the city maintains a higher share of the region’s jobs (34 per cent) than of the region’s population (27 per cent).

Realtor Bob Laurie said downtown Vancouver is being “taken over by residential real estate.”

Taylor said residential development has a higher rate of return because people will pay more to live in high-rise buildings than businesses will to use them.

The panel agreed the trend downtown is toward mixed-use residential/commercial buildings, such as the Shaw Tower in Coal Harbour.

© The Vancouver Province 2006

USA Today

WASHINGTON (AP) — Sales of new homes soared in March by the largest amount in 13 years, reflecting a rebound from bad weather in February. But the median price of the homes sold last month actually declined, providing evidence that the nation’s five-year housing boom is slowing.

The Commerce Department reported that sales of new single-family homes rose 13.8% last month to a seasonally adjusted annual sales rate of 1.213 million units. The increase represented a recovery from a 10.9% plunge in sales in February.

But the median price of homes sold in March dropped to $224,200, down 2.2% from what homes were selling for in March 2005. It marked the first time home prices dropped over a 12-month period since December 2003.

The median price, the point where half the homes sold for more and half for less, also showed a decline in March when compared to February, falling 6.5%.

Home prices last year soared as anxious buyers bid more to get into a sizzling home market. However, analysts believe that sales, which set records for five straight years, will decline in 2006 as the housing boom cools under the impact of rising mortgage rates.

Home sales were up in all areas of the country led by a 35.7% surge in the West. Sales rose 10.9% in the Midwest, 6.9% in the South and 4.7% in the Northeast.

“This is probably going to keep the Fed concerned about inflation. If the housing market is still healthy, policymakers will probably continue to raise interest rates,” said Gary Thayer, chief economist for A.G. Edwards & Sons in St. Louis.

The strong new-home sales pace comes after a trade association report Tuesday that showed existing home sales picked up 0.3% in March, defying expectations for a slowdown, as buying rose in less-expensive markets and warm weather encouraged buyers.

Rate of ownership far exceeds other ethnic groups: study

Wency Leung
Sun

GRANT M c KENZIE/VANCOUVER SUN SOURCE: The Decision to buy: Immigrant Characteristics and Homeownership Trends

The rate of homeownership amongst Canadians of Chinese descent is about 10 per cent higher than the national average, and far surpasses all other ethnic groups, although immigrants from mainland China are more likely to rent homes than those from Hong Kong, according to new research by a University of Victoria professor.

Based on the most recent 2001 Statistics Canada census data, 75 per cent of heads of Canadian households who are of Chinese origin own homes, compared with 63 per cent who identified themselves as non-immigrants, 67 per cent of those of European origin, and 65 per cent of those of multiple origin, said Barry Edmonston from the university’s sociology department.

While that has changed little since the early 1990s when homeownership amongst Canada’s Chinese population was 76 per cent, Edmonston said more recent immigrants have come from mainland China, rather than Hong Kong, which provided a surge of immigrants during the 1980s and 1990s. That has caused some significant shifts in home-buying trends, Edmonston said.

“The differences in those groups is really very strong,” he said by telephone Monday.

Edmonston studied immigrant populations in Toronto, and found that the large wave of Hong Kong immigrants during the 1980s and 1990s tended to settle in suburban areas, or in neighbourhoods outside the downtown core, where they could buy a home.

In comparison, more recent immigrants from mainland China are settling primarily in the downtown area, and are almost always renting.

“They seldom buy [homes] in the first five to six years,” he said. “They probably will eventually buy, but they’re not buying homes as quickly as immigrants from Hong Kong were buying.”

Unlike those from Hong Kong, recent immigrants from mainland China may not have had any previous experience owning a home and securing a mortgage, he said.

He added that new immigrants are also usually young, in their 20s, and are more likely to buy a home after 10 or 20 years, when they are older, have more money, and are more integrated into the country.

He noted, however, that the average financial savings for new Chinese immigrants who arrived in Canada in 2000 and 2001 was higher than almost all other ethnic groups.

Citing a University of Alberta study, Edmonston said average savings for Chinese immigrants was $40,000, compared with Europeans with $27,000, and Japanese with $36,000.

Edmonston said his research indicates Chinese immigrants are adapting well to life in Canada, but more research must be done to study variations within that group and other groups that have low homeownership rates.

“There’s some factors there that are related to ethnicity we don’t know now,” he said.

USA Today

WASHINGTON (AP) — Sales of previously owned homes edged up slightly in March but not enough to keep the inventory of unsold homes from hitting a record high as the once-booming housing market continued to flash signals of a slowdown.

The National Association of Realtors said Tuesday that sales of existing homes edged up a tiny 0.3% last month to a seasonally adjusted annual rate of 6.92 million units.

The March increase followed a bigger 5.1% jump in February with the two months representing the first advances since five consecutive monthly declines.

The median price of a new home rose to $218,000 last month, a gain of 7.4% from a year ago. That price increase was far slower than the double-digit gains turned in last year as the housing boom was peaking.

Another report showed that consumers shrugged off higher gasoline prices in April and sent a widely watched barometer of consumer confidence to its highest level in almost four years.

But the Conference Board warned that if fuel prices continue to rise, it would cast a pall on consumer spending, which accounts for two-thirds of all U.S. economic activity.

The Conference Board said that its consumer confidence index rose to 109.6, up from a revised 107.5 in March. April’s reading was the highest since the index touched 110.3 in May 2002. Analysts had expected a reading of 106.4. Confidence has been on an upswing since November in the aftermath of the Gulf hurricanes, except for a sharp dip in February.

“Improving present-day conditions continue to boost consumers’ spirits,” said Lynn Franco, director of The Conference Board Consumer Research Center in a statement. “Recent improvement in the labor market have been a major driver behind the rise in confidence in early 2006. Looking ahead, consumers are not as pessimistic as they were last month.”

Franco added that expectations for the economy and labor market have been trending downward since peaking in 2003, however. She said that “while prices at the pump have yet to impact confidence, further increases could dampen consumers’ mood.”

Analysts said that so far this year home sales are running 4% below the pace set in 2005, a year in which home sales set a record for a fifth straight year. Analysts believe that rising interest rates will result in a drop in sales of existing homes of around 6% this year as the five-year boom in housing slows.

The big question is whether the slowdown is gradual or something more severe which could trigger plunging home prices.

David Lereah, chief economist for the Realtors, said the sales increases over the past two months were a hopeful sign that sales will experience only a slight drop-off this year.

“This is additional evidence that we’re experiencing a soft landing,” he said. “The market clearly is stabilizing.”

By region of the country, sales were up 1.7% in the Northeast and 1.2% in the Midwest but fell 0.7% in both the South and the West.

The inventory of unsold homes rose to 3.19 million units at the end of March, which was the highest total on record. That inventory represented a 5.5-month supply of homes at the March sales pace, which represented the longest period needed to exhaust the inventory since it stood at a 5.6-month supply in July 1998.

Lereah said that the report continued to show a tale of two cities with areas that had been booming experiencing sales slowdowns while more moderate growth regions were still experiencing strong gains.

He said that Houston, Cincinnati, Ohio, and Albuquerque, were still experiencing strong sales gains while Fort Lauderdale, Phoenix and the San Fernando Valley of California were seeing a slowdown in sales.

Shortage looms: Crunch could come in a decade, forum told

Jim Jamieson
Province

The Greater Vancouver Regional District could run out of usable industrial land by the end of the next decade, hobbling the local economy and discouraging business investment, a forum on the region’s future was told yesterday.

And the scarcity will only push land prices even higher.

Ron Bagan, managing director of Western Canada, Colliers International commercial real-estate company, told a group of stakeholders at the Morris J. Wosk Centre for Dialogue that statistics from a new GVRD study indicates an industrial land crunch looms 12 to 14 years away, but could come in a decade if the situation isn’t addressed.

The study showed there are 2,775 hectares of land not being used for industrial purposes, but designated for future industrial development. But Bagan ran the audience through a process of elimination whereby the number was quickly reduced to about 1,415 hectares.

“It’s not at a crisis stage yet, but there is a serious shortage coming in terms of industrial land,” he said. “We’ve got to decide where we want this development to be and how we’re going to co-ordinate the infrastructure.”

Bagan cited the example of Vernon-based Kal Tire, Canada’s largest tire distributor, which opted to build a 250,000-square-foot warehouse on a 12-hectare site in Chilliwack instead of Surrey because land was about $1.25 million per hectare less and development costs were about $1.5 million less.

It was clear following a question and answer session with attendees that a solution will have to balance maintaining a sustainable, livable region with making more land available to the market. One suggestion was increasing density on current land. But a particular point of controversy was whether some of the shortfall should come out of the Agricultural Land Reserve.

Rob Cruickshank, president of the B.C. Technology Industries Association, called on all levels of government to get involved.

“It’s great to talk about the land requirements, but if we haven’t created the strategy to get us there so we know what type of industry is going to use that land, it’s for naught,” he said.

© The Vancouver Province 2006

Eager buyers snap up Downtown Eastside development

Chad Skelton
Sun

VANCOUVER – Many thought it would be a tough sell: High-end condos, some costing more than a million dollars, in the heart of the Downtown Eastside.

But as of 6:30 p.m. Saturday — less than 12 hours after sales began — every single one of the 536 condo units at Woodward’s had been purchased.

“We’re sold out,” Bob Rennie, the seasoned condominium marketer who organized the sale, said Sunday.

In all, Rennie and his staff sold more than $200 million worth of property — the largest single day of sales in his career.

The quick sell-off exceeded even Rennie’s optimistic prediction that 90 per cent of the units would sell the first day.

With large-scale advertising tagging Woodward’s as an “intellectual property,” Rennie said he targeted a specific group — first-time homeowners in their mid-20s and mid-30s — who were willing to live in a grittier neighbourhood.

“They didn’t want to live in a standardized, homogenized environment,” said Rennie. “They wanted something that’s leading edge.”

Thousands of people phoned in on April 13 to get colour-coded wristbands that determined their place in line on Saturday.

Prices started at around $235,000 for the smallest units, at around 590 square feet, and topped out at just over $1 million for 1,100 square feet and a view.

When the Woodward’s redevelopment is completed in 2009 — 16 years after the department store closed its doors — its residents will be living in one of the poorest and most drug-infested neighbourhoods in Canada.

And they will be sharing their building with 200 social housing units on the bottom 12 floors.

However, the condos in Woodward’s will feature high-end finishing, such as polished stone countertops.

And the building will house recreational facilities, a grocery store, a drugstore and Simon Fraser University’s School for Contemporary Arts.

Rennie said he envisions more large-scale developments in the Downtown Eastside in the years to come.

“I really believe the city is moving east,” he said. “It’s got nowhere else to go.”

He said he hopes the Woodward’s project can serve as a model for the rest of the Downtown Eastside — a way of slowly gentrifying the area without kicking out its poorest residents.

“The less fortunate and the fortunate living together is a model for the future…. It works. So let’s do some more of it,” he said. “Why don’t we go in and take some of these rundown single-room-occupancy buildings, rebuild them and put condos on top?”

© The Vancouver Sun 2006