Monthly Archives: January 2013

The euro crisis no one is talking about: France is in free fall [Fortune]

A fascinating article by Fortune Magazine! A full read is mandatory.

Given investors’ confidence in its sovereign debt, and its image as Germany’s principal partner in the sturdy, sensible “northern” eurozone, you’d think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France’s ten-year government bonds stands at just 2%, just a few ticks above Germany’s. From a quick look at the headline numbers, France doesn’t appear nearly as stressed as the derisively titled “PIIGS,” Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn’t as distressing as the figures for the PIIGs, or even the U.K. and the U.S.

France’s vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France’s support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro’s birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.

A deeper look shows that France is mired in no less than an economic crisis. The eurozone’s second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France’s products — its cars, steel, clothing, electronics — cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That’s causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.

The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it’s France — not Greece or Spain — that now poses the greatest threat to the euro’s survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.

So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.

That’s already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It’s absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.

The world’s investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.

You can read the full article here.

Great Canadian real estate crash of 2013 [McLeans]

Article on the expected, or according to McLeans, in the progress housing “crisis” in Canada:

It’s not just Vancouver where realtors’ BlackBerrys no longer buzz. In Toronto, the city’s once insatiable demand for living in 650 sq.-ft. glass boxes has evaporated overnight. Condo sales are down by 30 per cent, while prices have fallen by 4.5 per cent. Some proposed projects have been put on hold, while some angry investors—like those who bought luxury suites at the Trump International hotel—are desperate to get their money out, and have turned to the courts. Even the Bank of Canada, which has helped inflate the bubble by tempting Canadians with years of rock-bottom interest rates, has issued a rare warning about the risks posed to the broader housing market of too many condo developers in cities like Toronto and Vancouver chasing too few buyers.

Summing up the entire article,

In such a scenario, the homeowners most at risk are those who are overextended. Of the $570 billion in mortgages that the CMHC insures, about half are borrowers with less than 20 per cent equity in their homes. “If housing lands hard and affects the broader economy, many people will find themselves effectively underwater at a time when they would most need mobility to pursue employment,” Rabidoux says. “In this scenario, a house becomes a prison.” And it’s not necessarily condo buyers or those who paid over a million to live in a hot downtown neighbourhood who are most at risk. Rabidoux says people who shelled out for sprawling “McMansions” in the suburbs could be in particular trouble, as the demand for oversized homes is expected to fall out of favour when baby boomers retire and seek out smaller living spaces closer to the city. Indeed, that’s precisely what happened in the U.S., where some estimates peg the number of unwanted “large-lot” homes at about 40 million across the country. As for smaller houses, Andrew says there remains a shortage of single-family homes in cities like Toronto and Vancouver, which should keep demand relatively high. “If you are buying a three- or four-bedroom house right now, then I think you’re going to be okay,” he says.

Actually, the above is a valid point. I was recently having discussion with an acquaintance, and they purchased a house in the suburbs, with 2500 sq ft, and one hour commute to downtown Toronto, the couple paid a whopping $650,000. That is a handsome sum of money, and significant for most families, especially when the economy seems on shaky footing.

One of the gravest mistakes is to get into investments because the interest rate is too cheap, even though the investment itself may not have that much great rate of return. Real estate investment (such as a house) maybe worthwhile if the purchaser will be living in the dwelling himself/herself, and would be able to afford the dwelling even if they lose the job for 6 months. Such a purchase should not be purchased with the end in mind of renting the unit or capital appreciation, as the softening of the market would decrease the rent and the price, both at the same time. The article notes this point quite eloquently;

The concern is that the market is being driven by speculators, not families. Many condo purchasers buy off a floor plan—often borrowing against an existing property—and then sell or rent their unit once it’s completed several years later (units can also be sold, or “assigned,” to another buyer while a tower is under construction). “So far, the demand for units and supply has not been too far out of balance,” says Ohad Lederer, an analyst at Veritas Investment Research, citing estimates that investors comprise half of the Toronto condo market. “And that’s reflected by a relatively robust rental market. But I’m definitely concerned that, over the next couple of years, an imbalance will emerge.” It’s happened before. In Miami, a pre-2008 condo boom left 7,000 new units unoccupied after the crash. The upside? College students could suddenly afford to rent swanky suites with granite countertops and ocean views.

Lederer recently sent secret shoppers to several condo sales presentation offices. They made some disturbing discoveries: sales staff who didn’t ask for mortgage pre-approvals and who grossly misrepresented the demographic trends—namely the number of expected new immigrants to Toronto—that are supposed to keep units in high demand. But Lederer says he is most disturbed by the sector’s “shoddy mathematics.” By his calculations, many condo owners who rent their properties are realizing returns of less than four per cent. If rental rates fall as more units come on the market—Lederer estimates there are at least 5,000 too many condo units being built in downtown Toronto—those same investors will soon be losing money, prompting them to sell. “Being a landlord is already a negative cash proposition at today’s prices,” he says, adding that a bust in the condo sector will likely have a “trickle up” effect by reducing demand for starter homes.

With discussion with multiple friends working in the finance industry, majority seem to agree that it is best to get into real estate, as “real estate always goes up”. Lets hope they are right!

You can read the full McLeans Article here.

 

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