Fitch is urging government micromanagement of housing:
Canadian home prices remain overvalued relative to historical macroeconomic fundamental drivers, Fitch Ratings says. Despite government efforts to moderate growth, home prices rose 7.1% in May (on a year-over-year basis) according to the Canadian Real Estate Association. In addition, both property sales and building permits for residential construction have picked up in recent months. Home prices also continue to be supported by historically low interest rates and a lack of supply in the major metropolitan areas; these factors have propped up affordability and drive demand. According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms.
We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases. The ratio reached a high of 164.1% in third-quarter 2013 before declining slightly in the following two quarters. Fitch projects unemployment will likely remain in its current 7% range. But low interest rates are unlikely to fall further. Rising interest rates could pressure the market more than others given high borrower leverage and the short-term structure of Canadian mortgages.Fitch believes the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market. The underwriting guidelines for loans insured by the Canadian Mortgage and Housing Corporation (CMHC) have been tightened. CMHC has also pulled back on the amount of low-ratio portfolio insurance offered to lenders and limited securitization of insured mortgages to CMHC-administered programs. Furthermore, The Office of the Superintendent of Financial Institutions has issued a guideline for prudent bank underwriting that must be adhered to for bank originations as well as those purchased from nonbank lenders. However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing.
Sadly, there is nothing in today’s Ontario budget about buying us all new houses. They missed that one:
Most of the budget, however, lays out long-term plans for new spending.
It provides for $29-billion in new funds for transit, roads and bridges over the next decade, plus tens of billions more for other capital costs, including schools. The budget puts more than a billion dollars into various social programs, with raises for personal support workers and more funds for programs for people with developmental disabilities.
A new $2.5-billion fund for businesses is meant to help lure corporations to the province and encourage existing operations to expand.
The plan also allocates a billion for a new road or rail link to the Ring of Fire, a Northern Ontario mineral deposit that the government estimates will yield $60-billion worth of economic activity.
The document further introduces the Ontario Retirement Pension Plan, a pension system for people who do not already have one through their employer, that aims to double the benefits of the Canada Pension Plan for retirees.
There have been an interesting couple of articles lately on US employment trends. The first approves of extreme pickiness when hiring:
Since the recession, many employers halted widely distributed cost-of-living raises. Instead, they’re giving big bonuses and salary boosts to a select few. The average pay raise might be 2 percent, but the extra cash is shared among a small group of employees who have leverage, says Thomas Gimbel, chief executive officer of Chicago-based staffing company LaSalle Network. For them, he says, “Things are better than they’ve ever been.”
These wily pay strategies may also explain why there are so many open jobs. According to data released July 8, there were 4.6 million job openings in the U.S. in May, up from 3.9 million a year before. For key positions, companies are letting job openings stay open until they find exactly the right person, Gimbel says. In the meantime, existing employees must work harder to fill the gap. Then, for the perfect job candidate, they’ll pay up, he says. For example, a job listed for a $125,000 salary might be vacant for a year but then filled by someone who demands — and receives — $140,000.
The second one blames it on algorithms (beloved of Human Resources departments):
Expanding use of technology that uses ultra-specific criteria to screen and winnow candidates may be perpetuating one of the most unusual features of the slow rebound in the U.S. labor market: Despite a steady increase in openings since the recession ended in 2009, these positions are being matched with job seekers less efficiently than in the past. For each 100,000 new openings, for example, companies have hired about 48,000 people, compared with about 54,000 following the 2001 recession.
Software provided by Taleo, a unit of Oracle Corp. (ORCL), allows recruiters to conduct “precision matching” through a “profile-based recruiting system” that uses “advanced search and artificial intelligence to find and short list top talent,” according to a brochure on Oracle’s website.
For workers and job-seekers with exactly the right skills industries need today, the software programs can be a boon, filling their e-mail with notes from recruiters, talent scouts said. There’s also a benefit for companies in lower talent-acquisition and training costs.
There are also disadvantages for other job prospects: A candidate with some, but not all, of the required attributes may be eliminated or moved down the list. This may be one reason why people out of work for 27 weeks or more still represent about a third of the total unemployed, compared with an average of 19 percent between 2004 and 2007. The share is down from about 37 percent in June 2013.
Well, the proof of the pudding is in the eating and I would be loathe to pontificate about the evils of HR algorithms. But I will bet a nickel that over the long run, it is more costly for a company to be too lean than it is for it to be slightly over-staffed, with guys who are familiar with InventoryMaster 8.0, but – critically – unfamiliar with InventoryMaster 9.1.
Housing pundit Will Dunning, who I featured in the post How to Dissect a Housing Bubble, is in the news again, criticizing government micro-management of housing:
“If and when there is a correction in the condo market, the severity will have been aggravated by the actions of the federal government, which elected to depress demand at a time when demand was already beginning to weaken organically and a wave of supply has been developing,” Mr. Dunning writes in a new research note.
…
He sketched out a scenario in which Toronto’s condo prices would fall by about 10 per cent, as a result of rising supply and falling demand.“I believe that the federal mortgage insurance policy changes of the past few years will continue to weigh on demand, for both owner-occupants and investors,” Mr. Dunning writes.
His 10-per-cent-price-correction scenario also assumes that job creation does not bounce back to a healthier rate in Canada’s most populous city, and that interest rates remain constant.
“The timing of this process is highly uncertain – it probably won’t start for at least a half-year, and if there are further delays in (condo construction) completions, it could be a long way off,” he writes.
But micro-management is all the rage:
Banks shouldn’t count on a fresh round of European Central Bank cash to trade sovereign debt and reap big profits, Mario Draghi said.
“The convenience to use the ECB cheap money to buy government bonds is much less” than in a previous funding round which started in 2011, the ECB president said in testimony to the European Parliament in Strasbourg, France yesterday. “The general situation is such that these carry trades are going to be much less profitable.”
As spreads on government debt from Spain to Italy over similar German securities have fallen to record lows, a carry trade that was lucrative two years ago may now yield less, Draghi said. In a liquidity drive that pins cash to banks’ performance in extending loans to the economy, the Frankfurt-based ECB could extend as much as 1 trillion euros ($1.36 trillion) in its so-called TLTRO program starting in September.
A condition of that program is that banks have to meet a benchmark on lending to businesses and households, excluding mortgages, or else hand back the money in 2016.
“If banks don’t lend to the non-financial private sector, they’ll have to repay,” Draghi said.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets up 9bp and DeemedRetractibles gaining 8bp. Volatility looks pretty good at first – until you realize it’s half Floaters, which always bounce around a lot. Still, the Performance Highlights table is comprised exclusively of winners! Volume was low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 3.16 % | 3.15 % | 21,896 | 19.34 | 1 | -0.6276 % | 2,516.0 |
| FixedFloater | 4.16 % | 3.38 % | 28,978 | 18.68 | 1 | 0.3513 % | 4,173.0 |
| Floater | 2.86 % | 2.96 % | 46,632 | 19.85 | 4 | 1.1842 % | 2,770.0 |
| OpRet | 4.02 % | -4.06 % | 83,161 | 0.08 | 1 | -0.1176 % | 2,719.0 |
| SplitShare | 4.25 % | 4.01 % | 50,620 | 4.04 | 6 | -0.0422 % | 3,118.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1176 % | 2,486.2 |
| Perpetual-Premium | 5.52 % | -2.46 % | 81,951 | 0.09 | 17 | 0.0786 % | 2,429.1 |
| Perpetual-Discount | 5.25 % | 5.10 % | 107,435 | 15.23 | 20 | 0.1304 % | 2,574.8 |
| FixedReset | 4.39 % | 3.58 % | 196,522 | 4.76 | 76 | 0.0942 % | 2,562.9 |
| Deemed-Retractible | 4.98 % | 1.48 % | 126,906 | 0.12 | 43 | 0.0824 % | 2,549.9 |
| FloatingReset | 2.67 % | 2.12 % | 108,859 | 3.88 | 6 | 0.0526 % | 2,517.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.C | Floater | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-14 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 2.96 % |
| SLF.PR.H | FixedReset | 1.03 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.61 Bid-YTW : 2.84 % |
| CIU.PR.C | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-14 Maturity Price : 22.49 Evaluated at bid price : 22.83 Bid-YTW : 3.26 % |
| BAM.PR.B | Floater | 1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-14 Maturity Price : 17.78 Evaluated at bid price : 17.78 Bid-YTW : 2.97 % |
| CU.PR.C | FixedReset | 1.51 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 26.26 Bid-YTW : 2.36 % |
| BAM.PR.K | Floater | 1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-14 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 2.98 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.N | Deemed-Retractible | 150,500 | Scotia crossed 150,000 at 26.04. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-13 Maturity Price : 25.75 Evaluated at bid price : 26.01 Bid-YTW : -9.78 % |
| TRP.PR.A | FixedReset | 139,622 | RBC bought two blocks of 10,000 each from anonymous at 23.29. Desjardins crossed blocks of 24,400 and 21,400, both at 23.30. RBC crossed two blocks of 20,000 each, both at 23.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-14 Maturity Price : 22.42 Evaluated at bid price : 23.30 Bid-YTW : 3.69 % |
| TD.PF.A | FixedReset | 77,444 | Nesbitt crossed 44,600 at 25.51. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 3.57 % |
| POW.PR.G | Perpetual-Premium | 63,961 | Scotia crossed blocks of 19,400 and 40,000, both at 25.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-15 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 5.13 % |
| BMO.PR.K | Deemed-Retractible | 53,462 | TD crossed two blocks of 25,000 each, both at 26.08. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-13 Maturity Price : 25.75 Evaluated at bid price : 26.06 Bid-YTW : -1.05 % |
| MFC.PR.H | FixedReset | 53,051 | RBC crossed blocks of 23,600 and 25,000, both at 26.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 26.32 Bid-YTW : 2.68 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BNS.PR.R | FixedReset | Quote: 25.62 – 25.94 Spot Rate : 0.3200 Average : 0.2016 YTW SCENARIO |
| SLF.PR.G | FixedReset | Quote: 22.53 – 22.85 Spot Rate : 0.3200 Average : 0.2108 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 23.11 – 23.39 Spot Rate : 0.2800 Average : 0.1847 YTW SCENARIO |
| MFC.PR.L | FixedReset | Quote: 25.16 – 25.48 Spot Rate : 0.3200 Average : 0.2291 YTW SCENARIO |
| FTS.PR.G | FixedReset | Quote: 24.83 – 25.14 Spot Rate : 0.3100 Average : 0.2230 YTW SCENARIO |
| GWO.PR.S | Deemed-Retractible | Quote: 25.50 – 25.73 Spot Rate : 0.2300 Average : 0.1470 YTW SCENARIO |