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Cranes dominate Toronto’s skyline as construction work continues on condominiums in the Canary District east of the downtown. (Peter Power/The Globe and Mail)
Cranes dominate Toronto’s skyline as construction work continues on condominiums in the Canary District east of the downtown. (Peter Power/The Globe and Mail)

Morning Briefing

Pimco downbeat on Canada's housing market Add to ...

These are stories Report on Business is following Monday, March 3, 2014.

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

Pimco cuts Canadian holdings
The world’s biggest bond fund is taking a downbeat view of Canada's housing market, projecting a decline over the next few years and slashing its holdings in the country.

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Ed Devlin, who heads up Canadian investing for Pimco, told The Globe and Mail's Tara Perkins that the company expects a decline in house prices of possibly 10 per cent to 20 per cent in real terms in about three to five years.

"In nominal terms, I see it flat to down 10 per cent," he said.

"And if you get that kind of 10-, 20-per-cent real correction, that should alleviate some of the stresses," he added in an interview with our real estate reporter.

"And so that's kind of what what we're seeing. It will start this year, it could be bumpy along the way."

To be clear, Mr. Devlin is not forecasting a sudden crash, but he joins a chorus of voices, from Deutsche Bank to the Organization for Economic Co-operation and Development, in raising red flags.

Deutsche Bank, for example, believes the Canadian housing market is the most overvalued in the world.

Toronto-Dominion Bank, in turn, believes the market is overvalued by 10 per cent.

(Editor's note: The Financial Times earlier reported that Mr. Devlin called for a decline of up to 30 per cent, but later revised that to between 10 per cent and 30 per cent.)

Pimco’s primary Total Return Fund, with assets of almost $250-billion (U.S.), cut its holdings of Canadian debt to 2 per cent in the third quarter of last year, compared to 4 per cent 12 months earlier, according to the newspaper.

About a month ago, on Pimco’s website, Mr. Devlin wrote that there is little chance of an all-out meltdown in Canadian real estate and that he expects a more orderly cooling.

A full crash, he wrote, would only be sparked by developments he doesn’t see in the cards, such a sharp hike in interest rates, a sharp rise in unemployment or a disruption to mortgage credit.

Markets tumble
Global markets are reeling today on the latest developments in the Ukraine crisis.

Russia’s march into Crimea is playing out across financial markets, driving down stocks and boosting commodities such as oil and gold.

“The world has suddenly been elevated onto another level of tension as Russia's troops entered Crimea over the weekend,” said senior economist Jennifer Lee of BMO Nesbitt Burns.

“The unease felt by political leaders around the world as they watch this situation unfold is spreading to financial markets and, on this first trading day in March, there is a determined move towards safety.”

As The Globe and Mail’s Paul Waldie reports from Simferopol, Russia has moved troops into the southern region of Ukraine and surrounded three Urkrainian army basis.

Tokyo’s Nikkei fell 1.3 per cent today, and Hong Kong’s Hang Seng 1.5 per cent.

European stocks are faring worse, with London’s FTSE 100, Germany’s DAX and the Paris CAC 40 down by between 1.5 per cent and 3.4 per cent.

The S&P 500 and Dow Jones industrial average also slumped, by less than 1 per cent, while Toronto's S&P/TSX composite was just about flat.

Oil and gold prices, in turn, climbed.

"Escalating tensions in Ukraine and the risk of a wider military conflict, however small, could continue to boost demand for safe havens, including government bonds, gold and the yen, while undermining equity prices," warned Julian Jessop, the chief global economist at Capital Economics in London.

"German and other European equity markets whose companies are most dependent on Russian energy supplies have been hit hardest. But Japanese equities are also particularly vulnerable, given the close correlation between yen strength and Nikkei weakness."

How severe could the market fallout be?
The Ukraine turmoil may play out in financial markets for some time, analysts warn, largely in the energy sector.

“The crisis in Ukraine has the potential to have a further significant and prolonged impact on global financial markets, even though our current judgment is that the fallout is likely to be short-lived,” said Mr Jessop of Capital Economics.

“Europe is heavily dependent on supplies of Russian energy and oil prices have already jumped,” he said in a report.

“The financial burden of supporting any new Ukrainian government also looks set to fall mainly on the U.S. and on the EU, especially if Ukraine is given a fast-track to EU membership (not likely, but possible).”

First, Mr. Jessop cites the threat of a disruption to Russia’s energy supply to the EU, whether “as a result of Western sanctions or Russian manipulation.”

Russia, he pointed out, is a major oil supplier to Germany and the Netherlands, and natural gas supplier to western Europe.

The other main point is that Ukraine now needs some $25-billion (U.S.) to meet its debt and other obligations, with the possibility of hundreds of billions more over time.

“These are not particularly large sums when measured against the combined resources of the IMF and the major advanced economies who might be willing to offer bilateral support,” Mr. Jessop said.

“Nonetheless, every dollar spent on Ukraine is a dollar not available to finance bailouts elsewhere, including the weaker economies of the euro zone.”

Russian markets hit
Russian markets, in particular, were hit by the Ukraine fallout, sparking an unexpected rate hike, our European correspondent Eric Reguly reports.

Stocks plunged and Russia’s central bank moved forcefully, boosting its key rate by 1.5 percentage points, to 7 per cent, after the ruble tumbled.

“The Crimean reaction to the ousting of the Ukrainian government, the Russian response and the counter-response from the U.S./Europe, are the focus for markets,” said Kit Juckes, the chief of foreign exchange at Société Générale.

“The weekend's events will be followed by a lot of uncertainty and further risk aversion as a diplomatic solution is sought,” he said in a research note, adding that the ruble, the Hungarian forint, the Polish zloty and the Turkish lira will “remain vulnerable to contagion in the region” amid the possibility of a bigger capital exodus from Russia.

“ The importance of Ukraine as a link in Europe's energy supply line and as the point where Russia and the European Union meet, makes the idea that either side just backs down hard to imagine, but equally, provides plenty of incentives to work towards a diplomatic solution,” he added.

“So this will take time.”

Magna raises dividend
Magna International Inc. hiked its quarterly dividend 19 per cent today, to 38 cents, as it posted a surge in fourth-quarter profit.

As The Globe and Mail’s Greg Keenan reports, the Canadian auto parts giant reported a quarterly profit of $458-million (U.S.), or $2.03 a share, compared to $351-million or $1.49 a year earlier. Revenue came in at almost $9.2-billion.

Magna also forecast sales for this year at between $33.8-billion and $35.5-billion.

Osisko, Goldcorp reach settlement
Osisko Mining Corp. and Goldcorp Inc. have reached an out-of-court settlement over Osisko’s legal action aimed at blocking Goldcorp’s hostile takeover offer, The Globe and Mail's Bertrand Marotte reports.

Today's announcement came just before Osisko’s court action was set to begin in Quebec Superior Court.

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