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Your home may be worth less, but your city’s sound: Moody’s Add to ...

These are stories Report on Business is following Tuesday, Dec. 18, 2012.

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Home prices and city hall
A new study by Moody’s Investors Service may be little solace for Canadian homeowners: Your house may be worth less, but city finances are just fine.

The study released by today by the ratings agency finds that declining or softening prices in Canadian cities have a “muted impact” on the municipal governments because, as always, city hall can adjust.

“Latest indicators point to a softening in house price inflation in several Canadian cities, and price declines in a few cities, including Vancouver, British Columbia, Toronto, Ontario, and Montreal, Quebec,” said the report, authored by analyst Jennifer Wong in Toronto.

“This moderation in house price growth will likely have very little impact on Canadian municipalities’ financial positions, in our view, given their flexibility to ensure stable property tax revenue growth.”

(Moody’s used the Teranet – National Bank house price index, whose latest report showed prices falling in October from September by 0.6 per cent in Toronto and 0.3 per cent in Montreal. Prices in Vancouver eked out a 0.1-per-cent increase in October, but Moody’s noted they fell over the course of 12 months by 1 per cent.”

Municipal governments in Canada get a huge chunk of their revenues from property taxes, about half, on average, while there are no ceilings on rates, Moody’s noted.

Because they set rates by dividing the necessary revenues by the assessment base, cities are “generally able to compensate for changes in assessment values by adjusting the millage rate, both in times of rapid growth to avoid large tax bill increases, as well as in times of price declines to ensure revenues do not fall.”

Noting the recent cooling of the real estate market in the wake of the latest government mortgage restrictions, Moody’s looked specifically at Vancouver, Toronto and Montreal, where prices rose at compound annual rates of 5.2 per cent, 7.9 per cent and 5.6 per cent, respectively, over a three-year period ending in September.

Property tax revenues in Vancouver increased at an average annual pace of 4.1 per cent from 2007 to the end of last year, it found, despite marked volatility in prices.

In Toronto, that annual average was 4.9 per cent.

Mortgage defaults ease
Here’s a key fact, released today, where the housing market is concerned: “The number of Canadian residential mortgages that were three months or more in arrears was trending down in 2011 and the first half of 2012.”

That message from Canada Mortgage and Housing Corp. comes as the real estate market cools rapidly.

By most accounts, Finance Minister Jim Flaherty appears to be getting the soft landing he wanted, though some in the industry complain he went too far.

As The Globe and Mail’s Tara Perkins reports today, home sales across Canada slipped by almost 12 per cent in November from a year earlier.

According to CMCH today, residential mortgages in arrears by three months or more accounted for an average of 0.41 per cent last year, and 0.36 per cent in the first half of this year.

It compared that to the 3.04 per cent in the United States in the second quarter of 2012.

“Conservative mortgage lending practices in Canada are among the factors contributing to this performance,” CMHC said.

Mr. Flaherty has moved several times to cool down the mortgage market amid record debt levels among Canadian consumers. The latest restrictions came into effect in July.

“These are interesting times for Canada’s housing market,” said senior economist Robert Hogue of Royal Bank of Canada.

“Activity cooled substantially during the spring and summer but appears to have stabilized somewhat since August,” he said in a research note.

“Now the question is whether this apparent stabilization signals a bottom or is simply a pause ahead of further declines. While we recognize the risk of renewed weakness in an environment that is testing buyers’ confidence, we believe that the market is unlikely to crash.”

S&P boosts Greece
Well, here’s a change.

Standard & Poor’s Ratings Services today upgraded Greece, raising it from selective default to B-minus and saying its outlook is “stable.”

The rating agency’s move comes after its debt buyback and the decision by Europe’s finance ministers to hand Athens more in bailout money, more than €34-billion today.

“We view the euro zone member states’ decision to provide material cash flow relief to Greece as indicative of their determination to restore stability to Greek finances, and to preserve Greece’s euro zone membership,” the agency said.

That’s not to suggest all is well.

“Even after the buyback, Greece's end-2012 net debt-to-GDP ratio of over 160 per cent of GDP remains onerous,” S&P said.

“Greece's fiscal consolidation is largely premised on tax hikes and improved tax collection, an extensive privatization program, and wholesale cuts in government spending (adopted in November 2012),” it added.

“We believe these adjustments carry implementation risks given the projected further output contraction in 2012 and 2013, which will likely see social pressures persist.”

Cerberus to sell Freedom Group stake
A major U.S. private equity firm is getting out of the gun business in the wake of the tragic Sandy Hook killings and amid pressure from a big investor.

While it expressed shock and sadness over Friday’s horror, Cerberus Capital Management LP also said today that it plans to sell its investment in Freedom Group so it won’t be drawn into the raging debate over gun control.

That’s not to suggest that Cerberus was not truly horrified by what it called the “tragic and devastating event,” but it stressed its role is to look after its investing clients, among them the California State Teachers’ Retirement System, which said yesterday it was reviewing its investments with Cerberus.

A Freedom Group rifle was used in the killing spree.

“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level,” Cerberus said today.

“The debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment,” it said in a statement.

“As a firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators.”

Cerberus said it will hire advisors to sell its stake in Freedom Group, which allow the investment firm “to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.”

Oil price spread weighs on Canadian dollar
The spread between Canadian and global oil prices is playing out in the currency markets, weighing on the Canadian dollar.

As The Globe and Mail’s Carrie Tait reports today, the discount on western Canadian oil is not only huge, but is expected to continue through next year.

The bottom line, says senior currency strategist Camilla Sutton of Bank of Nova Scotia, is that Canada is importing oil at prices while selling it at low prices, creating a “negative shock” to the economy.

This had been playing out for a while, but settled down for a couple of months, Ms. Sutton said.

Recently, though, the spread widened again.

At the heart of the issue is what analysts say is a pipeline network desperately in need of an upgrade that would allow the flow of oil from west to east, meaning eastern refiners would not need to import as much.

For now, there’s a massive discount on the price of Western Canadian Select, of about $40 (U.S.) a barrel to the North American benchmark, West Texas Intermediate. The spread is even wider, more than $60, when measured against Brent, the global benchmark.

Charles St-Arnaud of Nomura Securities in New York has calculated that a $50 gap between WCS and Brent costs Canada some $2.5-billion a month because the country imports more than 40 per cent of its oil needs.

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