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Majority of households would feel strain under higher mortgage rates: BMO (Michael DeLeon/iStockphoto)
Majority of households would feel strain under higher mortgage rates: BMO (Michael DeLeon/iStockphoto)

Business Briefing

Sweden’s credit bubble a ‘test case’ for Canada Add to ...

These are stories Report on Business is following Tuesday, Oct. 28, 2014.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Sweden has a Canada moment
At least one economist sees the struggles of Sweden's central bank as a "test case" for Canada.

Bank of Nova Scotia's Derek Holt was referring today to the Riksbank's decision to cut its benchmark interest to zero, at the same time warning of the potential impact on already high consumer debts and already high house prices.

And thus you have the dilemma among central bankers in a post-crisis era of extreme uncertainty.

The Riksbank trimmed its key rate by more than expected and pushed back its timeline for a rate hike in a desperate attempt to boost inflation.

But even as it did so, it warned of the potential fallout as low rates mean cheap money that can drive up consumer debt and help inflate house prices.

“The fact that the repo rate is now being lowered further to get inflation to rise will increase the risks associated with high household indebtedness,” the central bank said in announcing its decision.

“It is therefore even more urgent now that these risks are managed,” it added.

“Reducing the risks requires measures aimed directly at household demand for credit. In addition, reforms are needed for a better-functioning housing market.”

As in Canada, Swedish policy makers have grappled with swollen household debt levels and rising home prices.

According to the latest report from Sweden’s financial regulator, real estate values have more than doubled, in real terms, since the mid-1990s.

And here’s the rub: In nominal terms, house prices have jumped by some 6 per cent a year, outpacing the 4-per-cent rise in family disposable income.

Sweden’s not alone.

Just last week, the Bank of Canada flagged renewed strength in the housing market, citing Ontario, Alberta and British Columbia, in particular.

By that, the central bank meant Toronto, Calgary and Vancouver.

Canadians, as we know, are juggling extremely high debt burdens that have been at or near record levels.

In his day, former Bank of Canada chief Mark Carney went so far as to warn of a rate hike if consumers didn’t mend their ways. And the late Jim Flaherty, Canada’s finance minister at the time, moved several times to cool the market.

The Bank of Canada hasn’t cut interest rates, and isn’t likely to. But it’s in no rush to hike, either, and is expected to lag the Federal Reserve when the U.S. central bank eventually moves.

"How things pan out for a small central bank with limited to no influence over the prices that are feeding deflation but that is fanning an ongoing credit bubble remains to be seen, but for now it is relying upon moral suasion by declaring that addressing household imbalances has become ‘ever more urgent,’” Scotiabank’s Mr. Holt said today of the Riksbank.

“The debate is relevant to [Bank of Canada] watchers as a test case,” he added.

“The BoC is also keeping policy options open and in favour of what I view as an asymmetrical bias to its inflation views, in favour of not worrying about upsides so much as inflation downsides, and also in the context of imbalances in the household sector.”

The low-rate-high-debt scenario is an issue among “small, open economies” like Sweden, Canada, Australia and New Zealand, said Mr. Holt’s Scotiabank colleague, chief currency strategist Camilla Sutton.

In countries such as those, unlike the United States, for example, wary consumers used the recession to pay down their debts, she said.

But even the Federal Reserve and others are nonetheless worried about such financial risks.

And remember, central banks helped create this climate to encourage household spending. Which has “played out in assets like real estate,” Ms. Sutton said.

The fear, of course, is that consumers are extremely vulnerable should unemployment spike or interest rates rise quickly.

“It’s one of the biggest dilemmas they’re facing now,” Ms. Sutton said.

Deal for Royal York
Toronto’s storied Fairmont Royal York Hotel is getting new owners and managers.

InnVest Real Estate Investment Trust and KingSett Real Estate Growth LP No. 5 unveiled a deal today with Ivanhoé Cambridge – the Caisse de dépôt et placement du Québec’s real estate arm – to acquire an 80 per cent stake in the property.

Ivanhoé Cambridge will retain a 20 per cent interest in the hotel, built in 1929 by Canadian Pacific Railway across from Union Station in the heart of the city’s downtown, The Globe and Mail’s Bertrand Marotte reports.

KingSett will have a 60 per cent interest in the 1,363-room hotel and take the role of managing partner in the joint venture, while InnVest’s share will be 20 per cent. InnVest will become the hotel’s asset manager and oversee the property’s hospitality operations in tandem with Fairmont Hotels and Resorts.

The partners plan to invest over $50-million for additional renovations over two years.

Facebook profit, revenue climb
Facebook Inc. posted sharply higher profit and revenue just after markets closed today, reporting what chief executive officer Mark Zuckerberg called “a good quarter with strong results.”

Facebook profit climbed in the third quarter to $806-million (U.S.), or 30 cents a share, diluted, from $425-million or 17 cents a year earlier.

Revenue jumped to $3.2-billion from about $2-billion.

Notably, ad revenue surged by 64 per cent to just shy of $3-billion. The share of mobile ads in that total rose to 66 per cent from 49 per cent.

Facebook also said the number of daily active users of the social media site rose 39 per cent to an average 864 million in September, while mobile users accounted for 703 million of those, or a gain of 39 per cent.

Monthly active users now number 1.35 billion, with 1.12 billion of them mobile.

What can you say about a stock in 140 characters?
Shares of Twitter Inc. sank today in the wake of its quarterly report and outlook late yesterday.

As The Globe and Mail’s Omar El Akkad reports, Twitter posted a quarterly loss of $175.5-million (U.S.), or 29 cents a share, compared to a loss of $64.6-million or 48 cents a year earlier.

Revenue climbed to $361.3-million from $168.6-million.

Of concern is user growth.

“Twitter, it would appear, is just not growing fast enough to catch up with Facebook,” said analyst Jasper Lawler of CMC Markets.

“The user base increased by 23 per cent in the third quarter, a big jump but not as much as was seen by Facebook at the same age,” he added.

“User engagement dropped by 7 per cent in the quarter after the World Cup. Twitter’s CEO Dick Costolo’s goal is the largest daily user group on the web, but in its current incarnation Twitter just doesn’t have the mass appeal of Facebook.”

Consumer confidence erodes
The Conference Board of Canada says its consumer confidence index slipped again this month, marking the fifth decline in six months.

“Canadians’ outlook on their current and future finances, job prospects and whether it was a good time to make a major purchase took a turn for the worse in October,” the group said, noting its measure dropped by 3.9 points to 84.

Lloyds, UBS in spotlight
Two major financial groups are in the spotlight today.

Lloyds Banking Group PLC announced new targets and unveiled plans to slash 9,000 full-time jobs by the end of 2017, at the same time saving a further £1-billion a year.

It also plans to cut many of its branches.

“As the U.K. economy continues to recover, we will seek group-wide growth opportunities whilst maintaining our prudent risk appetite,” Lloyds said.

Separately, UBS AG unveiled third-quarter results that included a fat charge – 1.8-billion francs, or almost $2-billion (U.S.) – marking provisions for litigation and regulatory issues.

As endorsements go …
As the saying goes, take it where you can get it.

Bloomberg news today quotes Kim Kardashian saying at a conference last night that she just couldn’t go on without her BlackBerry.

“A BlackBerry, it’s my heart and soul. I love it. I’ll never get rid of it. I do have an iPhone - I use that for photos - but if you have to handle an e-mail and you have to type fast I need to feel that board.”

By the way, she has three Bolds, just to be on the safe side.

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