Eug
Senior Member
I disagree. While salaries haven't gone up much, employment has stayed reasonably stable. That's an enormous win IMO.
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interested
Senior Member
I agree Eug that there has been a win in that employment has been stable. However, on closer inspection, part time jobs have replaced a lot of full time jobs and also, higher paid manufacturing jobs have been replaced by service industry jobs. So while the quantity may not have changed that much, the quality has.
I am not disagreeing with your conclusion that compared to the US and Spain and other countries, this is an enormous win.
However, if it continues going forward, and inflation is not met, then people are getting poorer slowly. It is a bit akin to the analogy of placing the lobster in the pot of water and slowly raising the temperature. The lobster does not realize he is dying as the temperature goes up as it is occuring slowly in small increments. However, in 10 or 20 years, the cummulative effect will be devastating.
That said, I don't disagree that QE1 was probably justified. QE2 more questionable, and if QE3, well in my view we are only feeding the junkie in the hope that somehow he will kick the habit. You saw the downgrade on outlook of the US. This is a big deal.
I am not disagreeing with your conclusion that compared to the US and Spain and other countries, this is an enormous win.
However, if it continues going forward, and inflation is not met, then people are getting poorer slowly. It is a bit akin to the analogy of placing the lobster in the pot of water and slowly raising the temperature. The lobster does not realize he is dying as the temperature goes up as it is occuring slowly in small increments. However, in 10 or 20 years, the cummulative effect will be devastating.
That said, I don't disagree that QE1 was probably justified. QE2 more questionable, and if QE3, well in my view we are only feeding the junkie in the hope that somehow he will kick the habit. You saw the downgrade on outlook of the US. This is a big deal.
daveto
Active Member
Ha - well, I'm definitely spending more than 3% more than last year. But that's mostly due to my girlfriend, rather than the CPI!
But wrt to the CPI, I'd say that many of my expenses have gone up much more that 3% but on the flip side some have gone down. Overall, I'd say that I'm less heavily weighted to the food/fuel element of the CPI, and so it hasn't hit me as noticeably as I think it has many families.
Is my "real" CPI higher than the reported 3%? I really couldn't say. Human nature is that we remember the things that cost more, and forget those that cost less. So I'm not convinced that the CPI figures are unrepresentative. But I'm not necessarily convinced that they are accurate either.
Sorry for the wishy washy reply!
interested
Senior Member
My girlfriend of 33 years (wife of 28) tells me she is the cheapest date I ever had. That's her take on it.
It reminds of the Rodney Dangerfield joke: I'm a millionaire and I have my wife to thank for it. If it wasn't for her, I'd have 5 million.
I agree with your point about remembering the price inflation and not paying attention to deflation. However, if you look at the CPI, my simple point was that food and fuel are items one buys every few days or weekly. Flat screens and computer equipment rarely, clothing less often. So the fact that these come down by 5% but are purchased say once a year for simplicity does not offset 5% in food prices bought 52x/year. And given that food especially for families tends to be a bigger budget item I would believe, I just think it is tougher. Most of the people I talk to tell me they are not much better off than 5 years ago unless they have had significant job promotions, which of course entails significant boosts in income.
It reminds of the Rodney Dangerfield joke: I'm a millionaire and I have my wife to thank for it. If it wasn't for her, I'd have 5 million.
I agree with your point about remembering the price inflation and not paying attention to deflation. However, if you look at the CPI, my simple point was that food and fuel are items one buys every few days or weekly. Flat screens and computer equipment rarely, clothing less often. So the fact that these come down by 5% but are purchased say once a year for simplicity does not offset 5% in food prices bought 52x/year. And given that food especially for families tends to be a bigger budget item I would believe, I just think it is tougher. Most of the people I talk to tell me they are not much better off than 5 years ago unless they have had significant job promotions, which of course entails significant boosts in income.
daveto
Active Member
Sure, I agree with you. The problem with the CPI is that the weighting of the components can vary a great deal depending upon one's circumstances.
Also, my understanding is that they factor out "improvements". So if you have a smart phone w data plan that costs so much more than your old basic cellphone, they make an adjustment because you are receiving greater utility from the added features.
Also, my understanding is that they factor out "improvements". So if you have a smart phone w data plan that costs so much more than your old basic cellphone, they make an adjustment because you are receiving greater utility from the added features.
Eug
Senior Member
My fuel expenses:
Natural gas: Probably hasn't changed that much. The price is similar, but I've used less this year since I didn't want to blow construction dust around the house, so I've kept the furnace off a lot of the time and heated with my wood and gas fireplaces, and some electrical heaters.
Electricity: It went up in cost in recent years, but part of that is due to "smart" metering. The other part is my electric heaters I had on this year. See above.
Gasoline: It's gone up, but I don't spend much on gasoline relative to the above two, and relative to my income. I fill up about twice a month, but each fillup is usually only about 30-35 L.
My food expenses:
It's gone way up, but that's just because I've been guilty of going out to eat all the time this year.
I guess I've been freer with my money this year because I'm being paid significantly more. I got a pay raise last year less than the core index of inflation, but I also am working extra part time. I don't need the money, but it's really easy work and pays well, so I agreed to take it on. So I get more money but have less free time, and consequently I eat out more.
OTOH, my TV I bought this year cost less than half of the TV I bought 3.5 years prior - exact same 42" size, both flatscreens. My TV in 2007 was $1299 for a lower mid-end LCD HDTV. My plasma HDTV I bought several months ago was $549, for similar quality, although I believe the LCD version of similar quality would have been closer to $699 or so. My computers were also significantly cheaper. (I sometimes spend more on a single computer than I do on gasoline for the entire year, and I average two new computers every few years.)
Natural gas: Probably hasn't changed that much. The price is similar, but I've used less this year since I didn't want to blow construction dust around the house, so I've kept the furnace off a lot of the time and heated with my wood and gas fireplaces, and some electrical heaters.
Electricity: It went up in cost in recent years, but part of that is due to "smart" metering. The other part is my electric heaters I had on this year. See above.
Gasoline: It's gone up, but I don't spend much on gasoline relative to the above two, and relative to my income. I fill up about twice a month, but each fillup is usually only about 30-35 L.
My food expenses:
It's gone way up, but that's just because I've been guilty of going out to eat all the time this year.
I guess I've been freer with my money this year because I'm being paid significantly more. I got a pay raise last year less than the core index of inflation, but I also am working extra part time. I don't need the money, but it's really easy work and pays well, so I agreed to take it on. So I get more money but have less free time, and consequently I eat out more.
OTOH, my TV I bought this year cost less than half of the TV I bought 3.5 years prior - exact same 42" size, both flatscreens. My TV in 2007 was $1299 for a lower mid-end LCD HDTV. My plasma HDTV I bought several months ago was $549, for similar quality, although I believe the LCD version of similar quality would have been closer to $699 or so. My computers were also significantly cheaper. (I sometimes spend more on a single computer than I do on gasoline for the entire year, and I average two new computers every few years.)
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Interesting re the inflation rate and what is/isn't included. I heard a report on the radio saying that the rate is so high because the cost of gasoline has driven it up. So is that a reporter's mis-information or is it in or what? Who do we believe? And I also have my MPP telling me how prices have gone down thanks to the HST; personally, I hadn't noticed that at all -- apart from the example Eug gives of electronics which I don't think has anything to do with the HST but rather is the normal thing that happens. And what about our stronger dollar? Where are price reductions -- that's been getting a lot of press lately.
daveto
Active Member
An article in the FP on David Rosenberg's reasons why inflation isn't coming.
http://business.financialpost.com/2011/04/19/5-reasons-the-inflationistas-are-wrong/
fwiw, I agree with his reasoning and conclusions. Rather than inflation helping to bring the income statement up the level of the balance sheet, I think that the current health of the balance sheet (stock markets, commodities, etc) is temporary due to the recent monetary policy and sovereign deficits. I think deflationary pressures will bring us back to test 2009 lows (unless the world's central bankers have some new magic up their sleeves).
http://business.financialpost.com/2011/04/19/5-reasons-the-inflationistas-are-wrong/
fwiw, I agree with his reasoning and conclusions. Rather than inflation helping to bring the income statement up the level of the balance sheet, I think that the current health of the balance sheet (stock markets, commodities, etc) is temporary due to the recent monetary policy and sovereign deficits. I think deflationary pressures will bring us back to test 2009 lows (unless the world's central bankers have some new magic up their sleeves).
redfirm
Active Member
Not attempting any scientific approach here, just using some numbers mentioned in the last 3 pages: inflation 3.3%, income increase 2-2.5%, r/e prices 12%. I hope these numbers are not correct.
klb86
Active Member
Anyone else notice there seems to be more commercials/advertising for condos in the past year? Actually I don't recall hearing or seeing any commercials for condos 2-3 years ago. All I ever heard about is how A condo has 100 ppl lined up, B condo has 150 ppl lined up since 2 days ago and people outraged at C condo that people are budding in line and paying random ppl to line up for them.
Just this week alone I've seen 3 commercials for "Quartz" at city place on CityTV. I've also seen a few other ones on CityTV in the past 6 months. Throughout the day I usually listen to z103.5 or flow 93.5 on the radio and there has been a bunch of commercials there too. (Chaz on Charles I've probably heard that one about 50+ times)
Might mean nothing, but just something I've noticed.
Just this week alone I've seen 3 commercials for "Quartz" at city place on CityTV. I've also seen a few other ones on CityTV in the past 6 months. Throughout the day I usually listen to z103.5 or flow 93.5 on the radio and there has been a bunch of commercials there too. (Chaz on Charles I've probably heard that one about 50+ times)
Might mean nothing, but just something I've noticed.
cdr108
Senior Member
Aspen Ridge has been heavily advertising for Scenic 3 on Eglinton towards investors on OMNI TV.
IIRC it's been going on since the New Year.
very deceptive too for people who don't know Toronto ...
they talk about walking distance to Yonge/Eglinton (~ 45 minutes) and being in Leaside neighbourhood, etc when it's nearer Flemingdon Park and Thorncliffe Park and surrounded by Hyde Park in Leaside TH rentals.
cdr108
Senior Member
re: CPI ... to remove "volatile" food and energy/utilities from the equation is the best gov't statistics scam out there.
considering everyone uses both on a daily basis and are "necessities", IMO it is very relevant and affects us more compared to the LCD TV, computer, car purchase, etc. which could be viewed as "wants"
my food expense has gone up 20% since 2010 for the same stuff ... fruits, veggies, meats, etc.;
gas(car) expense has gone up 25%;
utilities have gone up similarly, mostly from T-O-U electricity rates, and gas is flat even though prices are cheaper but colder this year
considering everyone uses both on a daily basis and are "necessities", IMO it is very relevant and affects us more compared to the LCD TV, computer, car purchase, etc. which could be viewed as "wants"
my food expense has gone up 20% since 2010 for the same stuff ... fruits, veggies, meats, etc.;
gas(car) expense has gone up 25%;
utilities have gone up similarly, mostly from T-O-U electricity rates, and gas is flat even though prices are cheaper but colder this year
interested
Senior Member
cdr; exactly my point too.
I agree totally once again with you.
Great minds must be thinking alike or
us fools seldom differ.
I agree totally once again with you.
Great minds must be thinking alike or
us fools seldom differ.
Eug
Senior Member
Speaking of fuel (and this is the fossil fuel I personally use the most):
Lower natural gas prices hit Encana
Encana Corp.’s (ECA-T31.200.020.06%) first-quarter profit dropped 95 per cent from the same time last year amid low natural gas prices
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Lower natural gas prices hit Encana
Encana Corp.’s (ECA-T31.200.020.06%) first-quarter profit dropped 95 per cent from the same time last year amid low natural gas prices
---
marsh
Active Member
Article from the Canadian Investment Review:
The Canadian Housing Bubble
How should policymakers tame prices?
April 21, 2011
Ultimately, the source of the Great Recession lies in too many people buying houses they couldn’t afford – in the U.S., in the U.K. and in Ireland, among other places, with knock-on effects elsewhere. To be sure, there was lots of risk-chicanery (it would be far too polite to call it risk-arbitrage) where dodgy loans were swept off book into structured investment vehicles pedalled to institutional investments for a few basis points over T-bill yields.
Would a fundamental analysis have helped? Robert Shiller’s 2000 book Irrational Exuberance suggested price-earnings ratios were out-of-whack with their historical averages, fleshing out the concerns Fed maestro Alan Greenspan expressed in 1996. Shortly after the book was published, markets collapsed. An accident of timing? Perhaps.
Shiller was similarly prescient, when he looked at the housing market in 2006 and found the basic metrics far above their long-term averages. Since then, U.S. housing prices have corrected 32%, – back to their 2003 levels – with more, apparently, still to come as too much supply meets too little demand.
If housing inflation was at the heart of the crash, could policymakers have done something to avert it – by raising interest rates? That wasn’t on offer in 2003, as the Fed, worried about the deflationary consequences of the dot-com bust, kept interest rates at what were then-record lows in the 1% band.
So companies were encouraged to borrow, and so were consumers. And borrow they did, at least U.S. consumers, pushing house price well beyond the usual metrics. Interestingly enough, some regional Fed researchers were seeing signs of overvaluation as early as 2004, looking at price to rent ratios (which should normally be 1).
“The majority of the movement of the price-rent ratio comes from future returns, not rental growth rates. This will not comfort everyone, as it implies that price-rent ratios change because prices are expected to change in the future, and seemingly out of proportion to changes in rental values.”
The Fed was powerless to prick that bubble. CPI doesn’t track housing inflation, as New York Times blogger Floyd Norris points out. It tracks owner’s equivalent rent (as in most OECD countries). The methodology was changed in 1983. As Norris writes, it seemed reasonable:
“The current approach, the BLS says, ‘measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.’ The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.”
Investment and consumption from a heavily debated terrain. Most municipal tax assessments, for example, are based on some form of market valuation, rather than owner’s equivalent rent. So house owners don’t entirely escape housing inflation volatility in their taxes (well, except for California.)
What’s relevant here is that owner-equivalent rent understates inflation in a boom and overstates it in a downturn. As Norris notes:
“The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.”
A bubble, in other words, hiding in plain sight. But the Fed is restricted to targeting price and employment stability, not tackling bubbles.
While Canada, so far seems to have escaped the gyrations of a housing bubble, metrics are similarly exuberant, as University of Western Ontario finance professor George Athanassakos recently pointed out.
“Home prices are simply way out of line, especially when viewed in relation to household income. The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5. It is difficult to see how income growth in the future can bring this ratio close to the historical average within any reasonable period – so it follows that house prices will have to decline.”
Some back of the envelope calculations: Median house prices should be about $285,000 in the Greater Toronto Area, with a 3.5 income to price ratio, assuming a median household income of $72,000. Instead, they are $385,000. Back of envelope because, as some may have noticed, real estate brokers prefer to report average house prices to median ones.
“Signs of stress are already evident,” Athanassakos writes, “especially when you look at household debt levels. In recent years, the gap between house prices and income has been bridged through borrowing. The average Canadian family debt hit $100,000 in 2010. About 17,400 households are behind in their mortgage payments, representing an increase of nearly 50 per cent since the start of the last recession.”
As in the U.S., an interest rate move up in Canada in response to changes in core inflation could have a whipsaw effect and take down the housing market – because it’s not adequately represented in CPI.
Maybe the definition of irrational exuberance – of a speculative bubble – requires further thought. Bubbles, as we have seen with the banks, can take a long time to work themselves out. Their duration seems small in long-term perspective. But in the short term, say five to 10 years, their effects can be quite devastating – the S&P 500 is still underwater compared to its 2000 peak and, as for housing prices, in the Greater Toronto Areas they took roughly a decade to reach their 1989 peaks.
The Canadian Housing Bubble
How should policymakers tame prices?
April 21, 2011
Ultimately, the source of the Great Recession lies in too many people buying houses they couldn’t afford – in the U.S., in the U.K. and in Ireland, among other places, with knock-on effects elsewhere. To be sure, there was lots of risk-chicanery (it would be far too polite to call it risk-arbitrage) where dodgy loans were swept off book into structured investment vehicles pedalled to institutional investments for a few basis points over T-bill yields.
Would a fundamental analysis have helped? Robert Shiller’s 2000 book Irrational Exuberance suggested price-earnings ratios were out-of-whack with their historical averages, fleshing out the concerns Fed maestro Alan Greenspan expressed in 1996. Shortly after the book was published, markets collapsed. An accident of timing? Perhaps.
Shiller was similarly prescient, when he looked at the housing market in 2006 and found the basic metrics far above their long-term averages. Since then, U.S. housing prices have corrected 32%, – back to their 2003 levels – with more, apparently, still to come as too much supply meets too little demand.
If housing inflation was at the heart of the crash, could policymakers have done something to avert it – by raising interest rates? That wasn’t on offer in 2003, as the Fed, worried about the deflationary consequences of the dot-com bust, kept interest rates at what were then-record lows in the 1% band.
So companies were encouraged to borrow, and so were consumers. And borrow they did, at least U.S. consumers, pushing house price well beyond the usual metrics. Interestingly enough, some regional Fed researchers were seeing signs of overvaluation as early as 2004, looking at price to rent ratios (which should normally be 1).
“The majority of the movement of the price-rent ratio comes from future returns, not rental growth rates. This will not comfort everyone, as it implies that price-rent ratios change because prices are expected to change in the future, and seemingly out of proportion to changes in rental values.”
The Fed was powerless to prick that bubble. CPI doesn’t track housing inflation, as New York Times blogger Floyd Norris points out. It tracks owner’s equivalent rent (as in most OECD countries). The methodology was changed in 1983. As Norris writes, it seemed reasonable:
“The current approach, the BLS says, ‘measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.’ The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.”
Investment and consumption from a heavily debated terrain. Most municipal tax assessments, for example, are based on some form of market valuation, rather than owner’s equivalent rent. So house owners don’t entirely escape housing inflation volatility in their taxes (well, except for California.)
What’s relevant here is that owner-equivalent rent understates inflation in a boom and overstates it in a downturn. As Norris notes:
“The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.”
A bubble, in other words, hiding in plain sight. But the Fed is restricted to targeting price and employment stability, not tackling bubbles.
While Canada, so far seems to have escaped the gyrations of a housing bubble, metrics are similarly exuberant, as University of Western Ontario finance professor George Athanassakos recently pointed out.
“Home prices are simply way out of line, especially when viewed in relation to household income. The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5. It is difficult to see how income growth in the future can bring this ratio close to the historical average within any reasonable period – so it follows that house prices will have to decline.”
Some back of the envelope calculations: Median house prices should be about $285,000 in the Greater Toronto Area, with a 3.5 income to price ratio, assuming a median household income of $72,000. Instead, they are $385,000. Back of envelope because, as some may have noticed, real estate brokers prefer to report average house prices to median ones.
“Signs of stress are already evident,” Athanassakos writes, “especially when you look at household debt levels. In recent years, the gap between house prices and income has been bridged through borrowing. The average Canadian family debt hit $100,000 in 2010. About 17,400 households are behind in their mortgage payments, representing an increase of nearly 50 per cent since the start of the last recession.”
As in the U.S., an interest rate move up in Canada in response to changes in core inflation could have a whipsaw effect and take down the housing market – because it’s not adequately represented in CPI.
Maybe the definition of irrational exuberance – of a speculative bubble – requires further thought. Bubbles, as we have seen with the banks, can take a long time to work themselves out. Their duration seems small in long-term perspective. But in the short term, say five to 10 years, their effects can be quite devastating – the S&P 500 is still underwater compared to its 2000 peak and, as for housing prices, in the Greater Toronto Areas they took roughly a decade to reach their 1989 peaks.