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Why there are growing fears of housing bubble in Canada

The euro logo sits in front of the European Central Bank

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Stories Report on Business is following today:

Greece wildfire spreads

The wildfire that is Greece's debt crisis spread to other parts of Europe and through financial markets today, driving down stocks, bonds and some currencies. Europe's situation was already volatile when Standard & Poor's added more pressure by downgrading Greece to junk status and cutting Portugal's credit rating. Credit default swaps related to Greece, Portugal and Spain all reached new highs, pointing to even greater troubles for the continent's weak economies.

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The crisis routed financial markets. European stocks and the euro fell, as did North American markets and the Canadian dollar.

"The situation in the Greek financial market has descended into chaos," Charles Stanley analyst Jeremy Batstone-Carr told The Wall Street Journal. "The European decision-making process has only exacerbated an already disastrous situation."

Last Friday, Greece sought to calm the markets by asking the EU and the International Monetary Fund for a bailout that could run to about €45-billion. But even that isn't working. Indeed, Goldman Sachs Group Inc. said in a research note today that the EU and IMF may have to lend the Greek government €150-billion over three years. And Citigroup Inc.'s chief economist warned Greece will probably default on its debts, or bondholders will take a massive haircut, unless it gets very easy terms on the support package.

"Ten-year yields in the other weaker members (Portugal, Spain and Ireland) have all moved higher today ... highlighting the rising contagion risk," said Scotia Capital currency strategist Camilla Sutton. "Should the market push financing costs any higher, the governments and corporates of the weaker members will also suffer under the weight of higher interest rates. At the same time, safe haven flows are moving into the stronger European sovereigns, pushing yields in Germany, France, Switzerland, etc., lower."

Markets are unclear on the timing of a bailout, and worry it won't come in time. They also fear that events in Germany, which is heading into regional elections and where the public opposes a bailout, may not bode well.

"Investors are looking for the next weak link in the euro zone," Simon Ballard, credit analyst in London with RBC Dominion Securities, told The Globe and Mail's European correspondent Eric Reguly.


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S&P rating cut hits Greece, Portugal

Canadian dollar sinks on Greek woes

David Berman's Market Blog on the rout


Eric Reguly on why the party's over for Greece

Housing bubble in making?

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Concerns over a potential housing bubble are growing. Edward Jones analysts warned in a report today that, while the real estate market escaped the meltdowns in countries such as the United States, "today's conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments."

Kate Warne and Craig Fehr listed three factors that point to a bubble: Prices well above historical averages, easy credit and lax government policy. While the federal government recently tightened up mortgage rules, the analysts noted that "we think the first two conditions characterize the current Canadian housing market."

Canada's real estate market dipped in the recession, but rebounded quickly and sharply.

David Rosenberg, the chief economist at Gluskin Sheff + Associates, also recently warned of "the looming real estate-related slowdown."

He noted that Canada did not see as dramatic a bubble in housing and credit as that in the United States. "But maybe Canada experienced its bubble in the past year instead," he said. "After all, homeownership rates, mortgage debt ratios and many home price valuation metrics in Canada have reached the same stretched levels the U.S. did back in 2005 and 2006."

Mr. Rosenberg went further, saying his statistical work shows that about half of the 7-per-cent annualized growth in nominal gross domestic product from the depths of the recession is due to the direct and indirect impact of the housing boom.

"And when we apply the price deflators to the various sectors of GDP, we actually find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector," he wrote. "In other words, if not for housing real GDP would have stagnated since [the second quarter of 2009]instead of rebounding at a 3-per-cent annualized pace."

The Bank of Canada also warned last week that it expects investment in the real estate market to cool considerably through this year and into 2011, though it was also referring to money pumped into renovations and there was no warning of a bubble.

Testifying to the Commons finance committee this afternoon, Bank of Canada Governor Mark Carney reiterated that "we see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance."

Mr. Rosenberg said that, while the central bank would never say so publicly, he believes it, too, is concerned. "Like the bank, I am totally blown away by Canada's V-shaped recovery and the housing bubble's role in shaping the bounceback," he said. "I wonder aloud whether or not the bank now wished it had begun the process of taking the punchbowl away from the housing market six or even nine months ago." Read the story


Auto makers rebound

Detroit's auto makers continue to show signs of a rebound.

Ford Motor Co. said today it posted its highest quarterly profit in six years, earning $2.1-billion (U.S.) or 50 cents a share in the first quarter, rebounding from a loss of $1.4-billion or 60 cents a year earlier. Revenue surged 15 per cent to more than $28-billion. Notably, the auto maker, alone among the Detroit auto makers in not seeking bankruptcy protection at the height of the crisis, said its U.S. sales soared 37 per cent and its North American operations were profitable. It also announced plans to increase North American production in the current quarter.

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Ford's earnings came as General Motors Co. announced plans to pump hundreds of millions of dollars into several North American plants, including its engine facility in St. Catharines, Ont. The $235-million investment in St. Catharines, to produce the next generation of V8 engines, and another $400-million at a plant near Buffalo, form the bulk of about $850-million it's spending to upgrade five engine and component plants, The Globe and Mail's auto writer Greg Keenan reports.

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Companies increasingly attracted to China

The world's companies are looking increasingly to China as a growth engine as its economy powers ahead and it becomes a coveted market.

As Ford reported its earnings today, it noted an 84-per-cent increase in Chinese sales. It's not alone:

- Japan's Mitsubishi Motors Corp. said today its sales in China surged more than 60 per cent in the first quarter from a year earlier.

- Mazda Motor Corp. also noted today that demand for its vehicles was weaker in all of its prime markets, but for China.

- Bayer AG, the big German drug manufacturer, said this morning its Chinese sales are up 28 per cent, and it expects the market to grow quickly over the next 10 years. Eager for a greater slice, it plans to introduce about 20 products in China over the next five years.

- Sharp Corp., the electronics manufacturer, also today reported strong sales growth in China.

- Navistar International Corp., the largest truck maker in the United States, said this morning its sales in China of heavy trucks more than doubled over five years, and it's nearing a deal with China's Jianhuai Automobile Group for a joint venture.

Tourre denies allegations

The hearing room of a Senate subcommittee in Washington was packed today as Fabrice Tourre, the man at the centre of the allegations against Goldman Sachs Group Inc.(GS-N152.990.960.63%), vowed to defend himself in court against the accusations levelled by the Securities and Exchange Commission.

"I deny categorically the SEC's allegations," the Goldman executive director told the hearing,. "I will defend myself in court against this false claim."

Mr. Tourre and other officials are testifying today, giving evidence on the runup to the crisis. Chief executive officer Lloyd Blankfein will also testify. Goldman has denied the SEC allegations related to subprime mortgage securities.

Europe's banks returning to health

The major U.S. banks aren't the only ones returning to health. Better results from Europe today also signal the sector rebounding. Driven by record investment banking profits, Germany's Deutsche Bank topped analysts' estimates with a quarterly profit of €2.8-billion. Like its U.S. rivals, it was pumped up by its securities unit.

Separately today, Britain's Lloyds Banking Group rebounded to a quarterly profit, faster than expected, while Sweden's Swedbank also posted a first-quarter operating profit for the first time in more than a year. Read the story

IBM boosts dividend

IBM Corp. today boosted its dividend by 18 per cent and at the same time increases its stock buyback. The company announced at its annual meeting that it is increasing its quarterly dividend to 65 cents (U.S.) a share from 55 cents. "This company, as a result of the investments made over the past eight years, has become very profitable with substantial cash flow," Jesse Greene, vice president for financial management, told The Associated Press. "We have the cash to make investments for the future and return cash to our investors."

Nexen profit dips

The struggling Long Lake oil sands project is on the verge of breaking even and should start seeing positive cash flow later this year, Nexen Inc. said today. After years of missed deadlines and operating problems, chief executive officer Marvin Romanow said the project is steadily improving and should more than double output by the end of this year.

His commends came as Nexen posted a dip in first-quarter profit of $185-million from $259-million in the fourth quarter. Read the story

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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