Snap, crackle, and possibly pop

Finally, an article on real estate appears in the Canadian media that is not written by someone using the Canadian Real Estate Association talking points. Saturday’s Financial Post has a comment from a Lakehead University economics prof, who has done some basic analysis of prices to annual rental value to come up with a price-to-earnings ratio for the housing market:

…in stock markets, whenever the P/E ratio for the market has risen substantially above 25 there has often been a correction, meaning a sharp drop in the prices of shares. The P/E ratio for Canada as a whole is about 28, suggesting that the real estate market may be overvalued. Overvaluation is less of an issue in markets like Saskatoon and Winnipeg. In light of the turmoil in the U.S. economy and the tightening of credit markets, which foretell a rise in interest rates, the question is not if but when the housing boom here will end.

Meanwhile, in Britain, the slowdown looks set to intensify. The Financial Times had an article in the weekend edition on how the expected downturn in bonuses in London’s finance community may already be affecting the housing market:

City high-flyers are struggling to obtain mortgages for multi-million pound property purchases as banks show a greater reluctance to lend on future bonuses.

Mortgage brokers have seen a number of applications from wealthy clients returned, which they believe weeks ago would have been approved without fuss. Lenders have also reneged on loans that had already been agreed.

Banks, which have increasingly been willing to lend large sums on the back of one strong bonus year, could start to demand a longer track record of rising bonuses. It is understood that Woolwich and Intelligent Finance are among those taking a more careful approach to lending on bonuses..

The tightening of credit could further stall house prices in an already cooling London market. Bonus money has been a huge factor in the strong growth of property prices in London and the south-east.

According to the Toronto Financial Services Alliance, the financial sector in Toronto accounts for 15.7% of Toronto’s Gross Municipal Product. I’m not sure how that’s measured, and what’s included as “Toronto” for GMP, so I’m still not sure how dramatically a downturn in bonuses here would affect the economy.

Meanwhile, Osama bin Laden empathizes with the struggling middle class:

He also speaks to recent issues grabbing headlines in the United States, referring to “the reeling of many of you under the burden of interest-related debts, insane taxes and real estate mortgages; global warming and its woes…”

Bin Laden appears to be moving from the stick to the carrot of Islam’s ban on money lending. As they say, you catch more flies with honey:

“To conclude,” bin Laden says, “I invite you to embrace Islam.” He goes on to say: “There are no taxes in Islam, but rather there is a limited Zakaat [alms] totaling 2.5 percent.”(h/t to Infectious Greed)