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A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Deutsche Bank chief international economist Torsten Slok certainly doesn't pull any punches with his assessment of the Canadian housing market. In a recent report, Mr. Slok calculated that domestic home prices are 63 per cent overvalued.
Now, like most homeowners my first reaction was a desperate search for reasons to ignore the distressing analysis, and we'll get to that. First let's look at the methodology.
Mr. Slok first points out the record levels of Canadian household debt which is something we're all aware of. Second, and more interesting, the report highlights a rapid slowdown in demand for new mortgages which reflects declining demand for real estate.
Also somewhat surprising, Mr. Slok notes that the Canadian housing boom has been focused primarily on multi-family construction – condos and apartment buildings. The percentage of Canadians working in the construction industry, another new data point, was also highlighted at twice the U.S. level.
The counter-argument, used by domestic economists, is that affordability ratios – essentially mortgage payments as a share of income – are currently fine in Canada because of low rates. This suggests prices at current levels are sustainable, at least until interest rates climb or unemployment worsens considerably (Alberta, we're looking at you for the next few months).
"Canada housing market is 63 per cent overvalued: Deutsche Bank" – Bloomberg
"Deutsche Bank : 'Canada is in serious trouble' " – Business Insider
"Cooling Calgary real estate adds to fears beyond energy sector" – Lewis, Report on Business
FT Alphaville's Matthew Klein unwittingly added to Canadian homeowner anxiety this morning with "Easy money, housing bubbles, and financial crises." The post makes two points that do not bode well for the Canadian economy or financial system:
"First… the growth rate in private borrowing during an economic expansion predicts the severity of the subsequent downturn even when there is no financial crisis….
"Second, that the growth of the financial sector since the 1970s can be attributed almost entirely to the explosion of mortgage credit (mostly residential but also commercial) rather than lending for business investment or traditional consumer borrowing."
The entire post is worth reading, but the main thrust is that the credit deleveraging process in Canada is going to be highly unpleasant.
"Easy money, housing bubbles, and financial crises" – Klein, FT Alphaville
Investors won't be surprised to hear that financial stress is intensifying in the North American shale drilling sector. It helps, however, to get specific details and Bloomberg has obliged:
"Two months ago, Continental Resources Inc. (CLR), the shale driller founded by billionaire Harold Hamm, budgeted for $80-a-barrel oil and planned to spend $4.6-billion in 2015. Six weeks later, with crude down 29 percent in the interim, Continental cut its 2015 budget to $2.7-billion.
Halliburton Co. (HAL), the world's biggest provider of fracking services to oil companies, announced Dec. 11 that it would dismiss 1,000 workers. Two months earlier, Chairman and Chief Executive Officer Dave Lesar said 'our sector will be fine' if oil prices range between $80 and $100 a barrel. "
"Oil below $60 tests economics of U.S. shale boom" – Bloomberg
Stony Brook finance professor and economics enfant terrible Noah Smith writes that the politics of the economics profession has lurched to the left, led by Paul Krugman. This was the part I found particularly interesting,
"Economics has been shifting from singing the praises of free markets. Instead, it has moved toward a greater focus on inequality, human welfare and the ways that markets break down.
In academia, the shift has come partly through the introduction of new tools, and models that reveal the shortcomings of unfettered capitalism. Game theory shows how competition can lead to waste, and models of asymmetric information also show how markets can fail. Decision theory, learning theory and behavioral [sic] economics have poked holes in the old assumptions of perfect rationality. Even in macroeconomics, all the focus is on incomplete and imperfectly functioning markets."
"Economics stars swing left" – Smith, BloombergView
FT Alphaville's David Keohane continues to cement his positon as the go-to public source for analysis of the Chinese economy and financial system. This morning, Mr. Keohane presents the case both for and against developed market investor concern over Chinese deflation pressures.
"Deflating China" – Keohane, FT Alphaville
See also: "China is stockpiling vast quantities of cheap oil" – Quartz
Tweet of the day, "@ac_eco Here's Canada's unemployment rate without Alberta's boom. twitter.com/corylvenable/s… "
Diversion: "Has Los Angeles fixed its gang problem?" – Marginal Revolution
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Scott Barlow