Sound Bites: What's next for global stock and Vancouver real estate markets?

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July 27, 2016 - Yesterday the Federal Reserve released a non-controversial policy statement essentially saying that risks were not as high as last meeting (which took place right before Brexit) and that the labour market was showing some signs of strength. Essentially, it left itself enough wiggle room for the rest of the year to either raise rates, do nothing, or backtrack should the data turn south. If the data does allow the Fed to become more hawkish over the next few weeks, the risk for a contraction in stock prices will rise along with ensuing tighter financial conditions. Indeed, the market is already facing a tightening of sorts as LIBOR (London Interbank Offered Rates) has been edging up to multi-year highs in advance of money market reforms in the US this fall. LIBOR indicates what financial firms generally have to pay to borrow from one another. If the Fed tightens financial conditions even further by prepping the market for a fall rate hike, borrowing costs are likely to spike further. However, the data would have to be running very hot for that scenario to play out as we just do not envision the Fed wanting to risk a stock market correction in the weeks heading towards an election.

Gold, for the time being at least, moved higher after the Fed stayed on hold Wednesday. That helped the INK Canadian Insider Index advance 0.35% on the day. The gold market seems to be expecting that the Fed will err on the side of letting inflation heat up more before it moves to cool things down.

Gold investors may also be anticipating some inflationary pressures out of Japan. There is widespread speculation that the Bank of Japan will take further measures to try and spur inflation when it issues a policy statement late Thursday night Vancouver time. Market participants believe the pressure is on the central bank to work in coordination with the elected government which is set to unveil another fiscal stimulus package next week. The Japanese Prime Minister has said the package will total some 28 trillion yen. However, there are no details yet on the how much of that may be new money or even "helicopter money."  If the package is anywhere near that amount in "new" or "helicopter" money, it could have a major impact on multiple markets. Of course, the same may be true, only in the opposite direction, if the package fails to meet expectations.

Time for Ottawa and Victoria to walk-the-walk together on Vancouver Real Estate

The BC government has put forward legislation that will require foreign buyers of residential real estate in the Vancouver area to pay a 15% transaction surtax on property purchases. There is little doubt the tax has the potential to be effective at least in the short-term. In Singapore, where a similar tax was imposed in early 2013, prices have dropped about 10% according to TD Economics. Now, there may have been other factors at play (such as a slowing local economy) so we cannot say for certain the tax was the key driver in cooling prices. Nevertheless, it seems reasonable to assume it played a role. Moreover, one only has to look at the very quick local reaction from the Vancouver Real Estate Board which almost immediately claimed the tax would disrupt pending home sales that have not closed by the time the tax is scheduled to go into effect (August 2, 2016).

While the tax has the potential to cool down the market, it will likely fail if it is not enforced. As with any tax or regulation, some people or companies will try to find ways around it. In the case of this surtax, the penalties include possible jail time for those involved with tax evasion. So, the deterrent is there. The only question remains is whether or not enforcement will be there. British Columbians will have nearly a year to find out before the next election. My sense is that Victoria does want to enforce this tax. But they will need help from Ottawa, and the Canada Revenue Agency in particular.

Given the role that Ottawa has played over the past few years in creating Vancouver real estate hyper inflation through the central bank and tolerance of money laundering, it is time for the spotlight to be firmly placed on the Canadian Finance Minister. Bill Morneau has made some initial moves that lay the ground work including more money for CRA auditors. Time will tell if he walks the walk, side-by-side with the provincial government.

Longer term, the effectiveness of the tax will ultimately depend on whether or not it lowers investor expectations over the long haul. If underlying market psychology does not change, housing prices could come roaring back so long as the Bank of Canada sticks to its ultra-low-we-are-in-state-of-economic-emergency rate policy.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast, catch the replay here.

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