One in 10 homeowners younger than 40 would be underwater on their mortgages if real estate prices crashed, according to a new study that warns the country’s red-hot housing market is disproportionately putting young Canadians at financial risk.

Nearly 260,000 Canadians would see their net worth wiped out if home prices dropped 20 per cent, the study by the Canadian Centre for Policy Alternatives found. The drop in prices is larger than most bank economists are predicting, but it represents the midpoint in the Bank of Canada’s estimates that the country’s home prices are overvalued by anywhere from 10 to 30 per cent, the study’s author, economist David Macdonald, writes.

Of those homeowners pushed underwater by a major real estate crash – owing more than they have in assets – more than half would be in their 20s and 30s, the age group that has gone the deepest into debt to buy a home.

Canadians in their 30s carry debt worth an average of four times their incomes. Their debt-to-income ratio is the highest, and has risen the fastest, of any age group, Mr. Macdonald writes. Thanks to the fact that they are highly leveraged, young Canadians would see 20 per cent of their net worth wiped out for every 10-per-cent drop in home prices, so that a 20-per-cent price drop would destroy 40 per cent of their net worth.

A price drop of 30 per cent, meanwhile, would wipe out 61 per cent of the net worth of the youngest homeowners. “The most at-risk families are those who are heavily leveraged, with all their wealth in their house and who arrived late to the real estate party,” he notes.

The situation would be “dramatically worse” in high-cost cities like Toronto, Vancouver and Calgary, where young homeowners are taking on the largest mortgages, the study says.

Middle-aged homeowners in their 40s, 50s and 60s would stand to lose the most money. Mr. Macdonald estimates they will lose an average of $70,000 to $80,000, as a result of owning more expensive homes. But that would only represent 23 per cent of their net worth, given that older Canadians tend to have more equity and less debt, and have less of their net worth tied up in real estate than younger homeowners. For those in their 60s and 70s, a 20-per-cent fall in prices would mean a drop of only 10 per cent of their net worth.

Governments must prioritize helping Canadians reduce their high levels of household debt if they hope to protect young families from the devastating effects of falling home prices when mortgage rates eventually begin to rise, Mr. Macdonald writes. “We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction,” he says. “There is still time to plan for that tidal wave.”

Federal programs introduced in the United States after the 2008 housing downturn gave unemployed homeowners the option to stop paying their mortgage for up to 12 months while they looked for a new job. Others programs allowed homeowners who were deeply underwater on their mortgages to walk away from their home with less of a hit to their credit score than a foreclosure.

A program that reduced the principal on the mortgages of struggling homeowners to reflect the new, lower value of their homes could be used to bail out Canadians in the same situation, Mr. Macdonald writes.

The U.S. Federal Housing Administration’s Refinance for Borrowers with Negative Equity program flopped south of the border in the face of resistance from mortgage insurance companies – only 4,600 out of a million eligible homeowners ultimately qualified. Such a program could benefit young homeowners here, but it would likely need buy-in from Canada Mortgage and Housing Corp. to be successful, Mr. Macdonald says.

Source: Housing price drop would sink young homeowners, study finds – The Globe and Mail

Policymaker says next five years will be crucial economic transformation period

China’s consumption will be a decisive factor in achieving the country’s next five-year economic growth targets, as its contribution to GDP will continue to increase, a senior policymaker said on Monday.

The driving power of investment, which was a major factor in preventing an economic hard landing in the wake of the 2008 global financial tsunami, will be relatively weakened, said Yang Weimin, deputy director of the Office of the Central Leading Group on Financial and Economic Affairs.

Net exports, meanwhile, “will be no worse than the current situation, but too fast growth is unlikely in the coming years”, Yang said on the sidelines of a news conference that introduced proposals related to socioeconomic development during the 13th Five-Year Plan (2016-20).

It stressed that the next five years will be a key period of transformation for the country’s economic growth model, marking the end of the high-speed growth driven by exports seen in the past 30 years, according to experts.

Completion of the entire transformation process may require more time, they said.

Zhang Xiaoqiang, vice-chairman of the China Center for International Economic Exchanges, said that process will last for at least three to five years, or even longer, during which period economic growth may face persistent slowdown pressure as the new driving force cannot be formed very soon.

“Difficulties will exist during the transformation, while the GDP growth rate should be no less than 6.5 percent on average in the next five years to achieve the goal of moderate prosperity,” he said.

To avoid a sudden economic cooling, investment should continue to play an important role, but inefficient and repetitive construction should be banned, said Yang.

“Fiscal reform under the next five-year plan is to reallocate rights and responsibilities among the central and local governments. The future model will encourage local government investment and lower local debt risks in order to ensure local governments’ stable fiscal income,” he added.

The National Bureau of Statistics indicated that consumption accounted for 60 percent of economic growth in the first half of this year, up from 51.6 percent in 2014 and 48.2 percent in 2013.

The contribution from gross capital formation declined to 35.7 percent in the first six months of 2015, down from 46.7 percent in 2014 and 54.2 percent in 2013.

Source: Consumer spending seen as key to economic growth[1]- Chinadaily.com.cn

The OECD has slashed its global economic outlook for 2016, reflecting subdued trade growth amid China’s economic slowdown.

The organization now expects the global economy to grow 3.3 percent next year, downgraded from 3.6 percent in its September forecast, as other emerging markets have weakened further, and to expand 3.6 percent in 2017.

“A more significant slowdown in Chinese domestic demand could hit financial market confidence and the growth prospects of many economies, including the advanced economies,” the Paris-based organization said Monday in its economic outlook report.

The OECD also lowered its growth outlook for Japan, saying it now expects the economy to expand 1.0 percent in 2016, compared with an earlier projection of 1.2 percent, dampened by a sharp slowdown in external demand and sluggish private consumption.

Growth in the world’s third-largest economy is expected to decelerate further in 2017 to 0.5 percent, following the scheduled consumption tax hike in April that year, though the economy will be supported by rising real wages, the OECD said.

“The outlook for Japan remains softer than in other advanced economies, despite an anticipated upturn in real wage growth,” reflecting weak external demand, especially in Asia, and strong fiscal headwinds particularly from the planned tax hike, it said.

Slowing demand in Asian countries has resulted in a “marked contraction in Japan’s exports and industrial production,” the OECD said.

The government is scheduled to release gross domestic product data for the July-September period on Nov. 16. After contracting an annualized real 1.2 percent in the April-June period, sluggish exports and production are raising concern that the economy may have shrunk again.

The organization called for additional measures aimed at fiscal consolidation, after the Abe administration announced a revamped fiscal strategy relying on stronger economic growth.

The OECD warned that even with the planned consumption tax hike, Japan is “not on track” to achieve a primary surplus by fiscal 2020, calling for further increases in the consumption tax rate and broadening of the personal and corporate income tax bases.

Growth in China is now projected at 6.5 percent in 2016 and 6.2 percent in the following year as its economy faces sluggish manufacturing investment amid excess capacity.

The OECD expects growth in the United States to remain relatively solid at 2.5 percent in 2016, led by strong household consumption and a moderate upturn in private-sector investment.

But it warned that the normalization of accommodative policy will pose challenges for emerging markets, with the Federal Reserve appearing poised to raise interest rates as early as December.

“With globally integrated financial markets, it may be difficult for them to respond to any interest rate increases in the United States and to any associated depreciation of their currencies or capital outflows,” the report said.

The OECD is projecting the eurozone to grow 1.8 percent in 2016, supported by sustained monetary stimulus as well as lower oil prices, while a high level of private debt will remain a drag on consumption and investment in many countries.

Among emerging markets, recession has emerged in Brazil and Russia, which is likely to continue next year amid weakening prices for oil and other commodities, the OECD said.

Source: OECD cuts global economic outlook for 2016 amid China slowdown | The Japan Times

By Caroline Valetkevitch

NEW YORK (Reuters) – World equity indexes dropped on Monday as disappointing trade data in world No. 2 economy China stoked concerns over weakening global growth, while oil prices slipped.

All three major U.S. stock indexes were down more than 1 percent, while European shares closed 1.1 percent lower.

Fresh builds at the delivery point for U.S. crude futures also dragged down oil prices, offsetting bullish OPEC demand projections.

Data showed China’s October exports fell for a fourth month, while imports also dropped, leaving the nation with a record high trade surplus of $61.64 billion. The United States is one of China’s biggest trade partners.

Also not boding well for world growth, the Organization for Economic Co-operation and Development cut its 2015 global growth forecast again. But it said the U.S. Federal Reserve should raise interest rates as the U.S. economic recovery gains steam.

Recent data showing robust U.S. job growth has boosted bets for a long-anticipated December rate hike by the Fed.

“Market participants are of the view (after strong U.S. jobs data on Friday) that the worries about the global economy are overdone but then this weekend we saw some disappointment in the China exports,” said Emile Cardon, a strategist at Rabobank in the Netherlands.

The Dow Jones industrial average fell 229.76 points, or 1.28 percent, to 17,680.57, the S&P 500 lost 28.97 points, or 1.38 percent, to 2,070.23 and the Nasdaq Composite dropped 75.98 points, or 1.48 percent, to 5,071.14.

Growth sectors, including energy and consumer discretionaries, led the decline.

“We’ve had a rally up, and I think we’re just about done for now, at least for the next couple of weeks,” said Gary Kaltbaum, president of Kaltbaum & Associates in Orlando, Florida.

MSCI’s all-country world index fell 1.0 percent, while European shares closed down 1.1 percent.

Shares in Portugal, where an agreement between leftist parties to work together to form a government unnerved investors, led the European market lower.

In the oil market, Brent crude for December delivery was down 28 cents at $47.14 a barrel, while December U.S. crude fell 46 cents to $43.83 after falling nearly 5 percent last week.

A report saying the European Central Bank was forming a consensus to cut its deposit interest rate further into negative territory caused the euro to slip against the dollar.

The euro had risen from its Friday lows, when it had fallen to $1.07045, its weakest since mid-April. But then it slipped back to trade at $1.0742.

U.S. Treasuries prices extended recent losses as traders raised bets the Fed will raise rates in December.

Benchmark 10-year Treasuries notes were down 3/32 in price with a yield of 2.345 percent. The 10-year yield earlier touched 2.377 percent, which was the highest intraday level since July 21, according to Reuters.

“People are really buying into the December rate-hike story,” said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.

(Additional reporting by Marc Jones in London, and Dion Rabouin, Richard Leong and Barani Krishnan in New York and Abhiram Nandakumar in Bengaluru; Editing by Bernadette Baum and Nick Zieminski)

Source: Stocks fall on China worries; oil loses ground – Yahoo News UK