Musings on Greenwood

My Brother Revises His Prediction (Only Slightly)

Hello folks,

   My brother is the resident housing guru on this blog. He has interpreted recent trends and made slight adjustments to previous expectations.

Ethan Rabidoux

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   Well, there is much to discuss. Despite lots of new data to emerge this week, what I would actually like to do is revisit two predictions I have made over the past few months.

    Let’s start with the prediction about interest rates.

    As you all know, I predicted that the Bank of Canada would NOT raise interest rates in July, contrary to the predictions of 99% of mainstream economists out there. Well, two new sets of data have emerged that have caused me to reevaluate my position, but only slightly, as both sets of data are misleading.

   Just so you all understand, the main job of the Bank of Canada is to regulate the money supply and maintain a ‘healthy’ level of inflation, generally targeted around the 2-3% level.

   This past quarter saw a growth in GDP of a little over 5% on an annualized basis. As GDP readings and inflation are generally closely tied, this has led many to speculate that this will add pressure on the Bank to raise rates. I agree. I do
think that it will add political pressure on the Bank, though I think it is misguided.

   The greatest growth of any subsector measured in the GDP came from…..wait for it…..real estate!!!!! So that puts the Bank in a bit of an interesting conundrum, doesn’t it? There is now political pressure to reign in what is perceived to be higher inflation around the corner, yet raising rates will kill the golden calf of GDP growth…..real estate. Interesting.

   The second data point came from the jobs report.

   The Bank has always been leary of raising rates after a recession until job growth is firmly entrenched. Guess what…..we have added jobs once again in February!!!!! Woo hoo!!!!

    However, if you look carefully at the latest jobs report, there is a glaring fact that jumps out at you.The private sector once again shed jobs while the public sector has added them, leading to the very misleading headlines such as the following:

http://www.google.com/hostednews/canadianpress/article/ALeqM5h6BA1lMF7uNkz4ET40fePiUWbjlA
 
   Here is the key line from this report: “The public sector added 45,600 jobs in February, while private employers shed 7,500 jobs.”

   So, unless we are heading towards a socialist state where we are all government employees, I see nothing particularly encouraging about the fact that the private sector is still contracting. And you can bet that the Bank doesn’t either.

   Despite this, it adds to the political pressure on the Bank to begin tightening. So, considering all this, let me give you my latest prediction;

   I still maintain that there is a 50% chance of the Bank NOT raising rates, particularly since the Bank is concerned about the rising loonie. However, I also now believe that there is a 50% chance of the Bank raising rates a token amount, simply as a means of appeasing misguided political pressure.

   If there is a bank rate rise, I imagine it would be about 0.25% and that it will stay there for some time, say at least until after the Fed starts their tightening in the US.

   As always, this prediction has the caveat that all is meaningless if there are renewed concerns about sovereign default risk, a la Greece part deux. In light of this, I still believe that long bonds offer interesting prospects. 

   As per my second prediction, you will recall I predicted that listings were set to rise, and that although sales will rise slightly as some fools will try to beat the HST, new mortgage rule changes and potential interest rate hikes, these sales will be swamped by rising listings as the herd tries to time the top of the market.

   Well, 1.5 out of 2 on my predictions ain’t too bad. Check out the latest graph of listings and sales in Vancouver. You will notice the blue line at the top, representing total listings, visibly trending upwards, while the red line at the bottom, showing sales, has actually declined over the past month. Interesting, no?

   Supply and demand at work. Prices will begin their downward march in a couple months once houses get harder and harder to sell and owners capitulate.