December 22, 2015

After A 10-Year Party There Will Be A Magnificent Hangover

Bloomberg reports on Canada. “The U.S. greenback broke above $1.40 vs. the Canadian dollar late last week in the wake of softer-than-expected inflation and wholesale sales prints north of the border. And according to Scotiabank Economist Derek Holt, the timing of the loonie’s slump is abysmal as it drains debt-laden households’ purchasing power precisely when big-ticket purchases, of such items as homes and autos, are running at all-time highs. And the higher they are, the farther they could potentially fall. ‘The currency’s plunge couldn’t have happened at a worse time for the country’s household sector,’ Holt lamented in a note. ‘When a currency declines as CAD has alongside a deep negative terms of trade shock, it is among the mechanisms through which markets price a large wealth transfer out of the country to the regions of the world that are large net importers of commodities.’”

“In some respects, the macroeconomic backdrop in Canada is similar to that of the mid-1990s. One major segment of the economy is overextended and in need of deleveraging. Back then it was the government; now it’s households. The loonie had softened, and external demand from a buoyant U.S. was—and is once again—required to help smooth the transition process. Unfortunately for Canada, the Boy Meets World era is over.”

“‘When judging the hit to the household sector there are two things to bear in mind: the starting point on the equilibrium matters enormously and that points to record highs across everything we can track by way of consumer and housing metrics,’ wrote Holt. ‘When your nation’s consumers have spent to the max because their purchasing power in world markets became so strong and then sharply weakened, the scope for significant downside risks cannot be ignored.’”

The Daily Herald Tribune. “The Canada Mortgage and Housing Corporation reported in their spring rental market survey earlier this year that the Swan City’s vacancy rate had risen to 2.6% in April compared to 1.3% the year before. In the CMHC’s fall 2015 report, the Grande Prairie vacancy rate had risen to 10.4% for October 2015. ‘If landlords didn’t adjust their rents in the last year, they’re going to be looking at a higher vacancy than a landlord who has adjusted their rent,’ said Bildson. ‘So I personally think that the CMHC’s numbers are skewed high because, perhaps, of the information they were given for that short blip. I would estimate that we are looking at closer to a 5-7% vacancy across the board here in Grande Prairie. Our tenants aren’t just in the exploration field here in Grande Prairie. They come from a much more diversified field than that so we’re a lot more sheltered than Fort McMurray for example.’”

Fort McMurray Today. “Apartment vacancy rates have soared to new heights in Wood Buffalo, according to the latest Canadian Housing and Mortgage Corporation report. About 30 per cent of units in apartment buildings were vacant in October, CMHC says, nearly triple October 2014’s total. At 29.4 per cent, Wood Buffalo’s vacancy rate is the highest in the country. Next highest is Estevan, Sask — another industry town — which comes in at 20.6 per cent. The Alberta average is 5.6 per cent.”

“Northview Apartments, a real-estate company that owns more than 800 units in Fort McMurray, says they’ve felt a hit due to the hard times in town. ‘Sustained low natural resource prices continue to negatively impact vacancy and financial results in (our) natural resource based markets,’ said Todd Cook, CEO of the group, in a press release. ‘Internal growth in (our) portfolio will remain constrained until there is a recovery.’”

“Rental prices have fallen about 13 per cent, according to CMHC, but they still remain the highest in the country. Average rent for a 2 bedroom apartment was $1,841, down from $2,118 in October of 2014, but still about $500 more than Vancouver, the next highest market.”

The Calgary Herald. “Calgary’s rental vacancy rate has more than tripled since October 2014, while prices have edged up slightly in the city, according to a new report from the Canada Mortgage and Housing Corp. Richard Cho, principal of market analysis in Calgary for the CMHC, said the slowdown in the economy has not only affected homeownership but the rental market as well. ‘We are seeing less rental demand in Calgary this year compared to last year,’ said Cho. ‘We’ve had some more units added to the market as well and that’s also putting some upward pressure on the vacancy rate.’”

“CMHC said the overall universe of purpose-built rental apartments increased by 3,890 units this year in Alberta. ‘This represents the second consecutive year the apartment universe increased following declines from 2004 to 2013,’ it said. ‘Low vacancies in the province over the past three years have contributed to more rental construction. By the third quarter of 2015, the total number of rental starts was already higher than any annual total since 1990.’”

“Lai Sing Louie, regional economist for the Prairie and Territories for the CMHC, said the ‘oil shock’ has impacted the economy in the province ‘especially when you look at oil-centred markets like for example Wood Buffalo.’ ‘That’s a very, very large vacancy rate,’ he said. ‘So what happens now is that landlords are trying to attract tenants and so the same sample rents in Wood Buffalo are almost down 13 per cent. It’s quite a reduction. In Cold Lake, the same sample rents there are down almost 37 per cent. So that’s a huge savings for renters there.’”

The National Post. “Landlord Michael Stringer used to have potential tenants fighting over his southwest Calgary condo. He’d have to remove online ads within an hour of posting them, lest he be bombarded with emails. But with vacancy rates rising and Alberta’s economy struggling, that’s no longer a problem. Stringer’s unit has been empty for nearly three months. ‘Maybe two or three people emailed me that they’re interested,’ Stringer said. ‘I just don’t think those renters are out there right now … this past year’s been a disaster for me compared to how it’s been.’”

“Stringer tried a free month of rent. When that didn’t work, he included all utilities in the price. Then he offered to give the place a fresh coat of paint in a colour of the tenant’s choosing. Although he says people seemed to value those bonuses, the condo remains unoccupied. Now, he says he’s considering cutting his losses. ‘It’s to the point where I don’t really want the headache anymore,’ Stringer said. ‘If it’s empty, I’ve got nothing to lose by selling it. I don’t know what’s next.’”

The Province. “Debacle. Moral hazard. Outspoken U.S. short-seller Marc Cohodes uses frightening words to describe his outlook for Vancouver real estate in 2016. Since The Province’s story in June featuring Cohodes — a prominent investor who bets on the collapse of speculative bubbles — the stock price of the Canadian subprime lender he is targeting has been cut in half. And that loss was despite double-digit price gains in Vancouver and Toronto homes.”

“But for several reasons Cohodes and a group of U.S. investors believe a rot of bad loans will spread and drag home prices down in 2016. They believe their Canadian housing research was validated in December when the federal government announced policy changes aimed at reducing excessive borrowing and fraudulent loans.”

“Cohodes believes Ottawa’s unstated intent is to remove ‘moral hazard’ — meaning risky financial behaviour encouraged by easy money and government-backed mortgages — from Canadian housing. ‘What all this means to me is Canada is putting the risk back in the market,’ Cohodes said in an interview. ‘But when you take the booze away after a 10-year party there will be a magnificent hangover. So I think 2016 will be a debacle. The speculators and money launderers will get burnt. But it will be good for younger people and the economy in the long-term.’”

“Bankruptcy trustee Blair Mantin of Sands & Associates says in the Fraser Valley he sees foreclosures rising quickly among condo speculators. ‘For me the horse is already out of the barn,’ Mantin said. ‘It’s too late, but I hope (CHMC mortgage tightening) will stop some people from jumping on the property ladder simply because they think they’ll be priced out.’”

Bits Bucket for December 22, 2015

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