Step Away From the Fiat

Based on the public CPI data, inflation adjusted, single family home prices in Toronto have outpaced inflation.

I have 4 questions, present this chart, and leave my 3 readers to draw conclusions.

1. What if the government CPI data is too low, what if they are off, by say, 20 basis points?

Toronto Inflation Adjusted House Prices

2. How much price appreciation is appropriate, given the fact that living in Toronto is arguably more desirable due to a wider selection of leisure activities.

3. How much price appreciation is appropriate, given that it is now more expensive (time and fuel) to commute into the city?

4. What if home prices, were just undervalued before – and the current price is where it’s finding an inflation adjusted equilibrium/fair value?

Bonus Question: According to the Globe and Mail, how much higher are inflation adjusted Toronto home prices today, than they were in the market peak of 1990? ONLY about 2%.  That’s right, Toronto is only 2% above a 2 decade old inflation adjusted price record.  The bears will point out, on that fact, we at thus at an extreme on the upside, and so prices will fall back towards averages.  The bulls will point out, sure, we likely will fall back towards inflation adjusted averages.  But, add inflation, and there is no bloody crash coming in price anytime soon.  I say, that’s what makes markets, inflation adjusted, it’s a coin toss from here.

Canadian Dollars are fiat.  Oil is not.

The average price of a single family home in Toronto, in 1966 was about 6734 barrels of oil.

The average price in 2009, was 5458 Barrels.

The average for 2010 to date, was 5508 Barrels.

The 44 Year average is 6665 Barrels.

The 10 Year average is 6697 Barrels.

The number of barrels of oil required to buy the average single family home in Toronto

I’m sorry, but I need to disclose my data before 1997, is not very reliable.

The Globe & Mail has some great charts out today.

I’m not supposed to copy them, for now, they are available here.

One shows the price of Canadian homes in the 5 major cities plotted against the “average worst 9 US cities” from 1997 to today.  Assuming, what they mean is “average worst [performing] 9 US cities [by price, since the peak]“. 

The US cities tripled (+200%) in 9 years.  The same group is now up only +80% in 13.5 years.

Calgary took 12 years to triple.  Calgary is now up only 175% in 13.5 years.  So, Calgary, the #1 performing city, experienced a slower climb, and in the long-run out performed.

The rest of the cities are all individually at all-time highs, up between 85% and 135% since 1997.

To review, some facts:

• The best 5 performing Canadian cities have climbed higher with less volatility than the worst performing 9 US cities in 13.5 years.
• 9 cities in the US were more volatile collectively, than any single Canadian city over a 13.5 year span.
• In causal linear systems, overshoot is correlated to undershoot.

Perhaps both systems are going to oscillate towards a steady state.  Doubt that.   But the largest 9 US cities do have 24.45M people.  Canada’s top 9, have 16.2M.  My point there, is by population we still have a long way to go before being compared to the American market.

And, how insulting to compare my nations top 5 cities, to the worst 9 in America.  I don’t know which cities were included in ’the worst’, but does Toronto really compare to Detroit, New York?  Does Vancouver really compare to Las Vegas, Los Angelas?  Does Montreal really compare to Miami?

Like my title suggests, I do have a contrarian signal for the bears to mull.  Of the 106 comments posted to the Globe & Mail article, I counted bullish and bearish posts.  71.4% were bearish.  That’s bullish.  It’s those 71.4% of people, who will be bidding on any dip in prices.

Long the Loonie.  Long Canadian Real-Estate.  Long Canada.

I was contemplating how to increase my exposure, to wall-street stupidity greed.

I conjectured one way.  Buying a 4-month out $120 straddle on CRM.  IV is way under-priced.  It goes against everything I believe in, to go long plain-vanilla, but there’s an earnings IV pump in 2 months, combined with fiscal multipliers starting to orbit earth, as the stock is making new highs after an IV crash. 

An easy 2%.  Buy the January 2011 $120 straddle for under $26.  Sell it for $26.50.  I’m going to bet my tesla on this, tomorrow AM, provided CRM gives me a couple minutes at $120.

The average price of a home sold in Bowmanville, Ontario, was up 11.2% to $272,769 in August YoY, outperforming the east end GTA which was up 8.9% to $331,002 YoY.  The median price in Bowmanville, was up 8.67% YoY, compared to the east end of the GTA’s median up 8.63% YoY.

During August, mortgage rates in Ontario, dropped by approximately 40 basis points on a five year fixed.  So, rates falling half way through the month, likely was was pushed prices higher, slightly.  September home prices, will be much more indicative of the health of the Ontario economy. ie. Will buyers come out, in response to lower mortgage rates?

“Don’t worry, the next generation will pay for the energy”, Toronto said today.

They approved a 4 storey ICE RINK, made of GLASS.

http://tinyurl.com/38gxob8

An architect's rendering of the four-pad ice rink. CREDIT: RDH Architects Inc.

In data released by Standard & Poor’s on August 4th, the top down operating earnings estimate for the S&P 500 during 2011 was $76.43 per share.  Bottom up estimate was $94.64.  The S&P closed at 1127 on August 4th.

In a file dated August 17th, 2011 top down, is now $82.12 – 7.4% higher than 13 days prior.  While, bottom up, was little changed to $94.40.  The S&P closed at 1092.54 on August 17th.

Could it be, the S&P computers, are Keynesian and starting to predict a response to the latest in FED policy? Or, are the numbers as worthless as the paper it’s denominated in?

If the models are accurate, we should bounce here.  The fed model, says the same.  Technical analysis on the other hand, says the bottom falls out of equities tomorrow, with oil following suit, and the long end of the yield curve prints fresh lows.  Who wins?

…by Ceridian via Globe and Mail.

Tesla Model S

More info here.  And here.

The Ontario market will likely see a great deal of volatility in the coming months, as it faces the ‘payback’ effect of the earlier gains related to buyers advancing their purchases to ‘beat’ the HST, new mortgage rules and anticipated rises in mortgage rates.

Consequently, we expect generally weak resales in the second half of 2010, with further monthly declines likely in the near term.

Pricing momentum is decelerating rapidly in Ontario, because much of the steam has run out of the market by now. With demand slowing down and the surge in new listings earlier this year having boosted the supply of homes available for sale, buyers presently have plenty of choice before them and, as a result, are gaining back some bargaining power. In our view, this will severely limit home price increases in the near term. That being said, the likelihood of outright declines is generally low because the market is expected to remain reasonably balanced. Any further drop in demand will be matched by reductions in supply (i.e., listings).

-Robert Hogue, Senior Economist at RBC, August 11th.

Since August 11th, mortgage rates have dropped by approximately 50 basis points on 5 year fixed rates.  The Toronto Real-estate numbers for SEPTEMBER, and OCTOBER, will be a great barometer into the health of the Canadian Economy.

If prices surge, on lower rates, that’s good news.  Anything but that, will be a troubling sign.  Gauging by my unofficial polling of people who say things like …

“I’m holding off, the housing market is going to cool off soon”,

compared against the lack of people saying things like

 ”I would really like to move, but I just can’t sell my home for enough money.”

I’m willing to bet on surprises to the upside for price action in the second half of 2010.  Time will tell.

I wonder, if 15 years ago, there was a bunch of Japanese analysts, shorting Japanese Government Bonds as they kept going, lower, and lower, and lower, and lower.  Probably.  That’s what makes markets.

Check this out. 

Japanese Mortgage Rates August 2010 (Click to enlarge)

At 1085, the indicated dividend rate on the S&P 500 is 2.11%. 

The 10 year, just hit 2.69%.

1.275x

At the beginning of .July, the newsflow made it sound like the world was going to end within days.

At 1022, the indicated dividend rate on the S&P 500 was around 2.24%

The 10 year, was around 2.95%.

1.32x.

In the middle of May, while the index plungged through 1071, the yield was somewhere around 2.13%.

The 10 year, was roughly 3.15%.

1.47x.

Just watching here. 

If stocks hit the lows from July, that multiplier breaks 1.2x.