World debt will impact Canada as well, says Carney

OTTAWA — Canada’s fiscal advantage will only go so far in protecting the country against a debt crisis growing in the world’s advanced nations and Asia’s emerging economic powerhouses, Bank of Canada governor Mark Carney warns.

Trying out a theme he will likely take to Washington later this week, Carney told the Canadian Club of Ottawa on Monday that the world is in the midst of a major economic power shift and governments must prepare by getting their fiscal houses in order.

Advanced economies face a protracted period of slow growth as they struggle to come out from under a mountain of debt, while emerging economies such as China will face the opposite challenge of restraining inflation.

“In this environment, domestic macro stability is paramount,” he said in notes from the speech released prior to his address.

“Sustained fiscal adjustment is now required in most advanced economies. Debt-to-GDP (gross domestic product) in G7 countries is now the highest since the Second World War. The age of austerity is not a slogan but a timetable.”

The issue of debt in Europe and increasingly in the United States has become one of the key challenges for the global economy, both in the long and short terms.

Last week, Finance Minister Jim Flaherty took his concern about the U.S. debt situation to Washington, since what happens there has direct implications for Canada on everything from exports, to interest rates to the value of the loonie.

Carney said experience suggests when debt exceeds 90 per cent of GDP, economic growth will slow, and that is a situation facing most of Canada’s major trading partners, particularly the U.S.

Canada is one of the few advanced economies that is not in that position — debt to GDP is projected to start falling as both Ottawa and the provinces move to balanced budgets. But that doesn’t mean Canada won’t be sideswiped, as it was in the 2008 recession when a financial meltdown among other countries submarined Canadian exports, Carney said.

“Fiscal slippage by some major countries may increase interest rates for all,” he said. Moreover, if growth in the U.S. and Europe is slowed, Canadian exports will again feel the pain.

The governor gave no hint about his own long-term plans for interest rates in Canada, suggesting that he will not hike the policy rate on May 31.

The transformation in the world, with three quarters of growth coming from emerging markets, does present an opportunity for Canadians, Carney added, but so far the corporate sector has not taken full advantage of it. Emerging market growth has boosted demand for commodities, leading to higher prices that have stimulated production and investment in the Canadian sector, he notes.

But the corollary is that only 10 per cent of Canada’s exports go into these fast-expanding markets and taking commodities out of the equation, Canada’s exports share into these markets has been almost halved in the last decade.

“Increasing market share in emerging markets will require sustained efforts to develop trade, technical and academic partnerships,” he said. “In tandem, Canadian business needs to improve its competitiveness, source new suppliers and prepare to manage in a more volatile environment

Why gas prices keep rising even when crude falls

Gasoline prices at the pump in Canada have climbed pretty much all winter, while in the United States they have risen for a remarkable 35 days straight, even as oil prices have see-sawed in recent weeks. Thedisconnect has enraged consumers, as they fork over nearly $4 (U.S.) a gallon or about $1.34 (Canadian) a litre to fill up their vehicles. Blame it on the crack spread, industry experts say.

“People automatically point to crude oil as the reason why the pump price has changed or should change,” said Michael Ervin, a petroleum industry consultant at Kent Marketing Services Ltd. But it’s not always the most important factor. “The increases we’re seeing now are entirely attributable to crack spreads,” he said.

What are crack spreads? The crack spread refers to the difference between the price of crude oil that refiners pay, versus the price of petroleum products such as gasoline that refiners produce and sell.

Why are crack spreads high now? It’s partly a seasonal issue. Demand for gasoline typically surges in the spring and summer, as drivers take to the roads more. The increased demand allows refineries to charge more for gasoline, even as oil prices remain relatively stable.

Which companies are benefiting? The big winners are the refining companies – those like Valero Energy Corp. that transform crude into useable products such as gasoline, diesel and jet fuel. Valero said that it expects a “strong second quarter,” as the company restarts some refineries and captures “outstanding margins” from the gap between sour crude prices and refined products. Canadian companies such as Suncor Energy Inc., and Imperial Oil, with refining arms complementing their oil production businesses, will also receive a boost. Profit tied to strictly to oil production, however, will be unaffected by what consumers pay to fill up their tanks because pump prices are not directly linked to oil prices.

Are there not ample supplies of gasoline? In the United States, draws on gasoline inventories were the highest in 13 years in early April and an unplanned outage at a refinery belonging to Sunoco Inc. in Philadelphia also dented gasoline supplies, according to a note published by UBS Securities. Four per cent of U.S. refining capacity was shut down in Texas City, Tex., including the country’s third-largest refinery. Operations belonging to BP PLC, Valero, and Marathon Oil Corp. have all been hit by power outages and some by subsequent fires, owing to rough weather. Wholesale gasoline prices in the Gulf Coast refined-products market then opened 5 cents (U.S) a gallon (3.78 litres) higher.

Can’t refiners just increase gasoline production? Yes, but that takes time and many have recently switched to the flourishing market for diesel fuel as an alternative. Refineries are selling a great deal of diesel, and new refineries are being tailored to produce the product as consumers shift to the greener fuel. Further, growing Third World economies are powered by diesel, and with demand for that fuel outstripping gasoline, the latter can be in short supply, said Ian MacGregor, chairman of North West Upgrading Inc., a company with plans to build a merchant upgrader that would turn bitumen from the oil sands into diesel fuel. “That’s a new restriction on gasoline supply,” he said.

What are politicians doing about high oil and gasoline prices?

U.S. President Barack Obama, facing discontent south of the border, wants to yank $4-billion in subsidies for energy companies, which are set to roll out rich first-quarter profits. In a letter to congressional leaders Tuesday, Mr. Obama said: “While there is no silver bullet to address rising gas prices in the short term, there are steps we can take to ensure the American people don’t fall victim to skyrocketing gas prices over the long term. One of those steps is to eliminate unwarranted tax breaks to the oil and gas industry and invest that revenue into clean energy to reduce our dependence on foreign oil.” http://www.theglobeandmail.com/report-on-business/why-gas-prices-keep-rising-even-when-crude-falls/article1999870/

Have a great day! Roy

Rent or Buy? Do the Math

William Hanley, Financial Post · Apr. 28, 2011

A young couple who have been renting in our modest Toronto condo building recently bought a home a couple of miles away in a nice old neighbourhood with the aim of starting a family. The house is a big, detached fixer-upper and the renovation costs will be extensive.

In moving up to the rungs on the property ownership ladder, our young friends are committing themselves to a quantum leap in monthly expenses: They came up with a substantial down payment; they are taking on a mortgage payment, property tax bill and other expenses almost twice as large as their $1,600 rent; and they are spending a large amount on the renovation and other costs associated with buying a house.

It is a story that has unfolded millions of times in Canadian history and one that will continue to unfold because home ownership is deeply ingrained in our culture, a cornerstone of getting established and getting on our way in life. People will make great sacrifices and otherwise twist themselves out of financial and emotional shape to buy into the dream.

They willingly become what we used to call “house-poor,” paying well over the one-third of household income that many professionals believe should be the threshold.

Over the past decade, owning has been a financial success for most people, with prices rising almost in a straight line, with low, low interest rates feeding into the equation and with homeowners’ equity subsequently bounding higher.

And yet, if it has been just about as good as it gets for so long, perhaps conditions are going to deteriorate at least somewhat, with prices likely to stabilize or retreat a little and with interest rates set to rise modestly at least.

Our friends and other buyers this spring will know that Canadian house price gains have been flattening out. The Teranet-National Bank House Price Index for February published this week showed house prices gained just 0.1% from January for a 12-month gain of 3.8%. It was the eighth consecutive month of deteriorating gains.

While the forecast of a 25% drop in house prices over the next few years by one widely quoted economist seems far-fetched under present circumstances, a pattern of smaller gains likely signals a flat to slightly lower market.

So, is it time to revisit buying versus renting? For most of the 30% of Canadians who rent their accommodation it’s simply not an option. Getting their hands on a significant down payment and having the flexibility to meet higher payments if rates rise is difficult at best.

But some people with the wherewithal to buy a property might want to keep renting, keep saving and investing, and keep their options open. Other long-time owners might even want to consider selling and renting, thereby locking in their tax-free gains.

If you wish to see how the math works, visit Jeff Zabel’s Mortgage Alliance Website and the Rent vs. Buy Calculator website. Even your technodunce reporter could plug in some numbers and come away with worthwhile conclusions.

A two-bedroom condo in our building might sell for $400,000. Let’s say you have a $100,000 down payment, a mortgage rate of 4.5% over five years, a $672 monthly condo fee, $200 a month in property taxes and other expenses of, say, $100 month.

Let’s also say that a two-bedroom might rent for $1,600 a month in the building, other costs might total $100 a month and the rent might rise 2% a year over five years.

All other things considered, the purchased condo would have to appreciate 2.33% a year, selling at $441,571 to match the gain made by renting a similar property in the building and investing the difference in outgoings at a conservative 2.5% a year.

The other way around, an owner could sell for $400,000 — with net proceeds of about $375,000 — and rent for $1,600 a month. The $375,000 could pay a conservative net return of, say, $10,000 a year. That $1,600 a month plus $100 in expenses would add up to $20,400 a year.

But deduct the net investment return of $10,000 a year and the condo fees of $672 a month, property tax of $200 and other expenses of $100 (for $11,664 a year), and the monthly rent for the former owner is basically paid. Or the former owner could invest the $10,000 a year and still end up paying only about $728 a month more than he was when he was owning.

Of course, this is just the rough math, which doesn’t take into account other factors, such as pride of ownership, the sense of place and the strong probability of building equity.

But geez. If I could live in the building basically for what I’m paying now in fees, taxes and insurance (by deploying my $10,000 a year investing return), and have my $375,000 to “invest” in winters in Waikiki and nice overnighters in Niagara-on-the-Lake, well then ….

It’s a thought, but only that. They’ll probably carry me out of here feet first from our condo, the equity in which may one day be needed to help us out in one of the emergency situations that can arise in older age.

Meantime, it wouldn’t hurt for everyone to do some math and determine what’s best financially for them — renting versus buying. And then, of course, throw the math out the window and succumb to the emotional tug of home and hearth.