Welcome to 2010

January 7th, 2010

I’m glad to see 2009 go from a mortgage lending perspective.

I’ll call it the year that all the rules changed. We went from getting a mortgage for people who could fog a mirror to people with great credit (780) and more than 20% down that were being declined.

At the same time new regulations came into effect (and a complete churn in new required documentation) and due diligence was the (not so new) catch word.

I would describe the year akin to playing a game where everyone was playing by a known set of rules and suddenly the rules change for everyone and know one is sure what the new rules are. Several lenders disappeared including one as recently as December. Just as I was starting to get used to the new rules and figure out which lenders fit where (they all reverted back to their primary niches), one of the major lenders disappears.

I’m supposed to be giving a “Market Update” next week. I think I’ll have to start with a little background of the fun that happened last year and hope that things have settled for 2010.

I have sent around a report from an economist I enjoy reading. He seems to think that not much is going to change for the coming year.  I’ll post it below for reference.

What To Expect In 2010?
By Benjamin Tal

• Economic Growth: Despite a relatively strong performance in the latter part of 2009, overall economic
growth in 2010 will disappoint. Look for only 2.1% increase in real GDP next year—a much slower
pace than a typical recovery year. The reasons for the relatively slow rebound are: continued weak
manufacturing and exports performance given a slow recovery south of the border and a strong
Canadian dollar; some softening in the housing market; and the end of government stimulus.
• Interest Rates: It appears that monetary policy in Canada is to a large degree being determined in
Washington. The Bank of Canada will not be willing to raise rates independently of the Fed. And given
the ongoing weakness in the US, interest rates there will not be rising anytime soon. Accordingly, look
for rates to start rising much after the mid-year move expected by the market.
• The Canadian Dollar: While it appears that the Canadian dollar is overshooting a bit now and, in fact,
might lose some ground in the very near future, it is still reasonable that the dollar will continue to
improve during most of 2010 to reach parity by the end of 2010. The main factors here are: a general
weakness of the US dollar, stable to elevated commodity prices and better economic fundamentals in
Canada.
• The Housing Market: It appears that the housing market is already overshooting by close to 7% and
by 10%-15% in western Canada. While we do not expect a dramatic correction in the market, we
expect the market to stagnate—mostly towards the second half of the year.
• The Bond Market: Given our view that the Bank of Canada and the Fed will take their time with
regards to the timing of the first hiking move, it appears that markets’ expectations of at least two
moves by the third quarter are unjustifiable. This mispricing provides some upside opportunities in the
bond market—mainly in the short end of the curve.
• Stock Market: It appears that the stock market is fairly valued from a short-term perspective, and still
has some upward potential relative to its long-term potential (given a full cycle earning expectations).
At this point, index investing will not be the best way to go. It seems that the nature of demand can
determine valuations in 2010, and this demand is for large recognizable names with high dividend. This
defensive move is what characterized the demand from older conservative investors that sit on no less
than $120 billion of extra cash.
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I’ve also heard from other economist and they seem to think that a rise in interest is unlikely. The bigger worry is the dollar and trying to keep it down more than stopping inflation.
What’s going to happen in 2010? Well the latter half of 2009 saw the thaw of the commercial market. I think we will see a continuation of this market back to previous levels if not higher as the market comes to the realization that even commercial funds are at an all time low rate. Even I’m able to get commercial loans for buildings in the 5-6% range (typically 8-9%).
HST will be passed (might be delayed but everything is in motion) in Ontario. No magic here, there will be a run up in activity prior to the HST coming into effect as everyone will want to avoid paying ANY more taxes. If you don’t believe me, just look at what happened in Toronto last year prior to city council passing their own “land transfer tax”. There will be a lull in the market for July (assuming it goes into effect late June early July) before people realize they still have to buy and it’s just another tax they need to take into account.
Of course the Bank of Canada’s guarantee of not raising rates will end at about that time, so naturally you will see panic in the market anticipating a rise (regardless of any fundamentals saying otherwise). BoC will probably increase by 25 Bps, the banks will increase by 50 bps in the panic and then the BoC will lower the rate after they realize they’ve just about killed the housing market and the banks will take their time lowering their rates by 30-40 bps.
I figure January – June will see record sales, larger than the biggest year in 2007 and the second half will match the activity in 2008 (going into the market meltdown).
For the investors in the crowd, why not look at avoiding the whole coming storm (i.e. rates aren’t going to get any lower folks) and lock into a long term rate? Set it forget it and continue to raise rents over the next 10 years. Mortgage paydown, appreciation over that time should leave you looking pretty good financially.

One Response to “Welcome to 2010”

  1. walshsurvey says:
    January 8, 2010 at 1:26 am

    Good Article. I love the thoughtful way you analyze. Problems in the second half of the year huh? That M word (meltdown)is very scary…

    Connie