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Financial Update January 25, 2010

Record home sales capping 2009 due to supply and demand, not bubble
Canada to press G7 finance ministers to reform financial system
* TSX 65.17 as energy and
materials producers rose on the back of stronger commodity prices.
investors will comb through the Bank of Canadas interest rate
announcement today and Monetary Policy Report on Thursday for hints on
when bank intends to raise rates for the first time since the recession
hit.
* DOW U.S. markets closed
for the Martin Luther King Jr. holiday.
* Dollar .28c to 97.42cUS
* Oil $.25 to $78.25US
per barrel.
* Gold $2.90 to
$1,133.40USD per ounce
* Canadian 5 yr bond yields
-.02 bps to 2.61. The spread (based on the MERIX 5 yr rate published
rate of 3.99%) is back within to the comfort zone at 1.38%.
*
The rate of return on your bond, can be read through a yield curve, If
the increase in bond yield continues to go up, the spread will continue
to shrink and this could be a trigger for interest rates to rise.
Ideally lenders are looking for a spread between 1.35 and 1.55
Record home sales capping 2009 due to supply and demand, not bubble
By Sunny Freeman, The Canadian Press
TORONTO  Record home sales last month are based on low supply and high
demand and are more likely to drop off this year than inflate a housing
bubble that could threaten a fragile recovery, economists say.
A Canadian Real Estate Association report released Friday said December
and the 2009 fourth quarter were the best periods on record for home
resales, while prices also rose sharply from their year-earlier levels.
Meanwhile, strong demand continued to deplete the number of homes for
sale and the estimated 5.6 months it would take to sell a house through
the Multiple Listing Service in December was less than half the 12.3
months it would have taken a year earlier.
The number of total listings fell 22 per cent in December from the same
2008 period and 12.6 per cent for the year.
The imbalance in supply and demand drove the national average price of
homes to $337,410 in December, 19 per cent higher than in December 2008,
but slightly lower than the 2009 average of $348,840.
Douglas Porter, deputy chief economist at BMO Capital Markets said while
high prices caused by strong demand and weak supply could pose a risk to
the fragile recovery, he is not willing to jump on the bubble
bandwagon yet.
A bubble occurs when prices increase without any sound underlying
market, which is closely tied to changing interest rates and economic
We still do have a relatively tight supply situation and /> low interest rates and a mild recovery in the economy, so there are a
lot of good reasons why home prices are rising.
What were seeing is almost textbook recovery, he said. The speed of
the recovery is mind-boggling, the fact that housing is leading the
recovery is really not a surprise& its exactly what youd expect to
happen.
Finance Minister Jim Flaherty said Friday he does not see a housing
bubble yet, but he noted the government has many tools at its disposal -
from raising down payment requirements on insured mortgages, to lowering
amortization periods and urging the banks to be more cautious in their
lending  to prevent such a thing from happening.
We dont want to have a group of house purchasers who purchased houses
now at insured mortgages at relatively low rates who would not be able
to manage them if rates were to increase later on, Flaherty said in an
interview with Business News Network, a cable TV business channel in
Toronto.
Ive looked at the numbers with CMHC, he added. Were monitoring it.
I do not see evidence of a bubble right now, but were going to keep
watching it. There are some steps we can take that we will take if its
The association said 27,744 units were sold across Canada in December,
up 72 per cent from the same month in 2008. The year-earlier period saw
the lowest sales in a decade in the wake of a global credit crunch and
the start of the recession in Canada.
The Real Estate Board set a record in December with
356 sales. The Real Estate Board of Cambridge recorded 150 sales, up 60
per cent from the same month a year earlier.
December also marked the end of the strongest quarterly sales volume
ever measured by CREA, with 137,957 homes sold over three months on a
seasonally adjusted basis  up 2.6 per cent from the previous record set
in the first quarter of 2007.
CREAs latest statistics will no doubt spark further bubble talk
amongst the usual suspects, said the associations chief economist
Gregory Klump. (But) cooler heads recognize that many of the recent
gains reflect temporary factors that could fade by summer.
The 59 per cent year-over-year fourth quarter gain drove last years
annual sales volume above 2008 levels, but the number of transactions
last year was 10.7 per cent below the peak reached in 2007.
The extraordinary decline in activity one year ago and subsequent
rebound, particularly for higher-priced real estate, is stretching
current year-over-year comparisons, said Klump.
Klump believes the market will balance out in 2010 because consumer
demand will be met with a supply side rise as the number of new homes
increases and cautious homeowners become confident about selling, which
will add more homes on the market and help drive prices down.
Porter said Fridays report signals that Canadians have regained their
confidence in the economy and the surge in demand is beginning to be met
with a serious supply response, citing a notable uptick in December
housing starts.
Builders had been very cautious and theyre only now starting to crank
up their output again, but even so, the comeback in new housing starts
has been much more modest than the rebound weve seen in sales, he
said. And people who own homes have also been a little reluctant to put
their house up for sale because of the broader uncertainty that weve
seen.
He said that the demand in housing was most pronounced in B.C. and
Ontario, where home buyers might be hoping to beat the introduction of
the HST, the harmonized sales tax which is set to replace provincial
taxes in those provinces later this year.
The Bank of Canada indicated last week that it was premature to be
talking about a housing bubble in Canada and said recent house price
increases are in line with supply and demand /> The bank considers the current hot market to be a phenomenon based on
temporary factors, such as pent-up demand from the recession, and low
mortgage rates.
A CIBC forecast released Thursday indicated that the hot housing market
will continue to drive economic growth during the first half of 2010,
but will come to a screeching halt in the second half of the year, when
interest rates are expected to rise.
The Canadian Press
Canada to press G7 finance ministers to reform financial system
By Julian Beltrame
OTTAWA  Canada believes time is running out for meaningful reforms to
the world financial system to avert future economic meltdowns and will
push for movement on the issue at next months G7 finance ministers
meeting in Iqaluit.
Canadian officials briefing reporters on what is likely to be the most
unusual G7 meeting ever say signs of hubris are again apparent among
many of the global financiers blamed for plunging the world into
Finance Minister Jim Flaherty is hoping that holding the meeting in
isolated Iqaluit in the middle of winter will concentrate minds and lead
to a renewed commitment to implement reforms.
The officials, speaking on background, said Monday that Flaherty is
concerned that the momentum for reform of the worlds financial and
banking sectors is waning as the economic crisis recedes.
The United Kingdom has imposed a punitive tax on executive bonuses, and
the United States is also proposing to tax its largest banks. But system
reform, such as ensuring risk is properly assessed, still remains to be
Canada believes the G7 countries have the primary responsibility for
ensuring abuses are not repeated since the crisis originated within the
worlds leading economies, the officials said.
The Iqaluit meeting in early February will be the first since the larger
Group of 20 forum was declared the pre-eminent body for dealing with the
worlds economic and financial problems.
And it will be unusual not just for its location, but also for its form.
Unlike past meetings, there will be no final communique issued of
policies adopted in principle by the ministers and central bank
By making the meetings more informal, the officials say Flaherty hopes
they will be more frank and useful and prove that the G7 club is worth
One official said the necessity of producing a communique, or final
concluding text, tends to concentrate discussions along producing
unanimity. Freed of the need to produce a text, ministers and governors
can engage in a more freewheeling, frank and political discussion.
One of those discussions will actually be held by a roaring fire, the
official said.
The future of the G7, whether it will remain as a separate institution
or becomes a subgrouping of the larger G20, remains up in the air and
will be an issue before the ministers and governors in Iqaluit.
One reason its important to Canada that the G7 remain an influential
institution is that collapsing the group into the larger G20 dilutes the
countrys influence at the top table.
The officials say the Feb. 5-6 meeting in Iqaluit will tackle the gamut
of issues dealing with the global economy, including ensuring the
recovery is sustainable, exit strategies from government stimulus
spending, global imbalances, currency exchange rates and trade.
One agenda item was added in the past week  Haiti  since the G7
countries are the biggest donors to the nations
relief effort.
Flaherty has indicated that with relief efforts underway, the G7 meeting
would be an ideal time to begin exploring how countries can help Haiti
reconstruct and recover from the disaster.
The meetings unusual location, above the treeline in the middle of
winter, has also necessitated contingency plans in case of inclement
weather.
Should Iqaluit become inaccessible from air for the Feb. 5-6 meeting,
the conference will be switched to Ottawa, officials said.

Financial Update January 25, 2010