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Housing buy/rent ratio shows real estate 'vulnerable' Add to ...

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What the buy/rent measure shows A buy/rent measure of Canadian real estate shows Canada's housing market is "vulnerable" to higher mortgage rates, Desjardins Securities says.

Canadian house prices have rebounded markedly from the depths of the recession, hitting a fresh record in may and bringing the buy/rent ratio to about 1.85x. That means that, even excluding major factors such as taxes and maintenance, homeowners pay about twice what renters pay.

"This is precipitously close to the 2.3x level reached in December 2007 and the 2.5x level reached in 1988, which preceded house price corrections of 13 per cent and 10 per cent, respectively," Ed Sollbach and Deep Jaitly of Desjardins said in a research note today, adding that when the buy/rent ratio hit an "unsustainable" 3.6x in Toronto in 1989, it triggered a 29-per-cent decline in house prices.

"Record low mortgage rates in the U.S. mean that house values are at all-time highs, relative to the competing asset class of rent, so U.S. housing offers great opportunity for both renters and investors," they said. "In Canada, a house may make a great long-term home, but the buy/rent ratio suggests Canadian real is vulnerable to a hike in mortgage rates."

While rents can swing sharply in areas such as Calgary, Desjardins says the ratio is a good indicator of whether home prices are undervalued or overvalued as rents largely remain stable while home prices are more volatile.

Asian countries winning currency 'cold war' Asian countries are winning a "currency cold war" that isn't about to end any time soon and could escalate into a hot war, Scotia Capital says.

Much is being made of currency tensions, particularly in the run-up to G20 meetings in South Korea. Much of the focus is on China, which is under increasing pressure to allow its yuan to appreciate, but other governments have also moved to hold down the value of their currencies, such as Japan and Brazil.

Focus has also turned recently to the United States, where anticipation of large-scale measures by the Federal Reserve, known as quantitative easing, has been eating away at the U.S. dollar. A lower currency helps boost a country's exports.

Currency strategists Camilla Sutton and Sacha Tihanyi trace the roots of this cold war to the last decade, and a "growth model" pursued by Asian economies in the wake of their financial crisis.

"This model involved a pursuit of export-based growth predicated on export competitiveness via cheap labour inputs and exchange rates much depreciated relative to their pre-Asian financial crisis levels," Ms. Sutton and Mr. Tihanyi said in a research note.

"This currency cold war has been active since the middle of the past decade when it became apparent that the U.S. current account deficit was widening to an unsustainable level," they noted. "This deficit was well supported by the currency regimes of emerging market economies, particularly those in Asia, which busily accumulated foreign exchange reserves in an effort to restrain domestic currency appreciation."

Here's what their research found:

  • Major global currencies have appreciated sharply against the U.S. dollar since the beginning of September. As of Friday, currencies of the G10 countries had climbed more than 7 per cent, and those of the EMEA group (emerging Europe, the Middle East and Africa) almost 9 per cent, but the currencies of emerging Asian economies just 4 per cent.
  • "Significant resistance" among Asian countries to currency appreciation was obvious between the beginning of 2002 to March of 2008, a period of decline for the U.S. greenback. Major currencies ran up by 64 per cent, and EMEA currencies 52 per cent. But "in glaring contrast," Asian currencies, excluding Japan's yen, appreciated by just 24 per cent on average.

The flaw in the model became evident in the recession as demand collapsed in developed countries, leading to sharp declines in the exports of emerging markets, the Scotia Capital strategists said.

Policy makers in emerging economies recognize the flaw, they said, but shifts take time and must include potentially politically delicate structural reforms. "Ultimately large domestic savings-investment imbalances need to be addressed by boosting domestic investment or consumption, or some mix thereof."

Because domestic adjustments take time, most of the emerging Asian countries will continue to fight with currency, fighting any fast pace of appreciation. The cold war will rage for some time, at least, they said, until domestic demand in Asia can be fostered.

"It is when developed nations no longer tolerate the burden that they bear in [foreign exchange]adjustments against the [U.S. dollar]foisted upon them by certain emerging market nations, that the cold war morphs into a hot war," Ms. Sutton and Mr. Tihanyi wrote.

RBC buys BlueBay Royal Bank of Canada, on an aggressive wealth management push, has struck a deal for London's Blue Bay Asset Management. The deal announced today is valued at about $1.54-billion (U.S.).

With more than $40-billion of assets under management, BlueBay is said to be one of Europe's biggest credit asset managers.

"This acquisition will further RBC's strategy to leverage our position as a top 10 global wealth manager, and continue to expand our asset management solutions for the benefit of our clients around the world," George Lewis, the chief of RBC Wealth Management, said in a statement.

Desjardins analyst Michael Goldberg said the deal reinforces the view that RBC is well capitalized, even under the proposed new global banking rules. "The wealth management space can provide an increased stream of stable earnings in the future, which should enhance Royal's future capital."

Citi posts strong quarter Citigroup Inc. today posted sharply higher third-quarter profits, just over analysts' estimates. The U.S. banking giant said it earned $2.17-billion (U.S.) in the quarter or 7 cents a share, compared to $101-million or a loss of 27 cents a year earlier.

Credit loss provisions of $5.92-billion were down sharply from $9.1-billion a year earlier.

Investors await Apple earnings Analysts expect Apple Inc. to post solid fourth-quarter results after markets close today, driven by the iPhone with a boost from the iPad and iPod.

"iPad sales were robust during the quarter as our checks indicated that Apple was likely selling 'every unit they could make' for the majority of the quarter," said analysts at UBS AG, whose 12-month price target on Apple stock is $350 (U.S.).

"We believe iPad sales during [the fourth quarter]likely beat our 4.5-million estimate (38-per-cent growth quarter over quarter) and believe there can be more significant upside to our 5.5-million unit estimate (22-per-cent growth quarter over quarter) for [the first quarter] Supply constraints for both iPhone 4 and iPad began to ease towards the end of September which bodes well for holiday quarter FYQ1. We believe that Apple is likely to have some of the most popular and heavily gifted items during this holiday season (iPad, iPhone, iPod), and sufficient supply will be one of the keys to exceeding street estimates for the quarter."

Public sector lags private on pay hikes Pay increases in the public sector are lagging those of private industry. Pay increases in major labour settlements dipped in August to 1.5 per cent, compared to 1.8 per cent in July and 2.2 per cent in June, numbers released Friday by Human Resources and Skills Development Canada showed.

Pay increases in the public sector averaged 1.4 per cent, and in the private sector 1.9 per cent in August, HRDC said. So far this year, pay increases overall are averaging 2 per cent, HRDC said.

BMO Nesbitt Burns noted that pay in the public sector "really is being held in check ... This could be the first time in five years that public sector wage settlements have lagged those in the private sector.

From today's Report on Business

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  • Citigroup Inc
  • Apple Inc
  • Updated July 20 4:02 PM EDT. Delayed by at least 15 minutes.

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