Canadian housing price, inflation and US dollar

1 Nov
2011

Housing Price and Inflation

Here is a graph of Canadian housing index (green line, left scale, Bloomberg ticker : CAHUIP Index) and CPI (blue line, left scale, Bloomberg ticker: CACPI Index) over 30 years .  I’ve also calculated their 12 month rolling over change (Y/Y) (right scale).

Two things  we can see here:

  • Over the last 30 years, inflation has increased more than housing price. In our impression, housing price has jumped a lot these years. But if we look at the history of the last 30 years, inflation jumps even higher.  What Keynes has ever said is so true. Even housing price can’t protect your wealth from inflation.

Keynes ever said :
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

  • The Y/Y change shows that during some periods housing price has jumped higher than inflation (red bar higher than blue bar), other time it is lower (red bar lower than blue bar) or it even decreases (negative red bar).
So the conclusion, from the aspect of investing, housing may not be the ideal asset to protect our wealth from inflation assuming the related income (i.e. rental) offset by the cost.

Housing Price and US Dollar

This is what I found very interesting.  The following graph is the inflation adjusted housing price (green, left scale, CAHUIP/CPI) and the US dollar index (blue, right scale, Bloomberg ticker: DXY curncy).

I see only one thing here:

  • the inflation adjusted housing price is negatively correlated with US Dollar index. When US$ becomes stronger, the house price becomes weaker; When US$ becomes weaker, the house price becomes higher. The exact timing of bottom of one and top of the other may not occur at the same time, but overall the long term trend clearly shows this negative correlation here.
When US$ is weaker, commodity price is stronger. Since Canada is basically a commodity based country, more and more money will flow into Canada which result in better economy and usually the unavoidable inflation (including house price obviously).
So the conclusion, US $ decides many things, one of which is the housing price in Canada. In the next 10 years, if you also believe US$ will becomes stronger, just as what I expect, maybe it is not a good time to invest in housing market at this stage. Where to put your money then? Real return bond, perhaps.

Review of QE

22 Sep
2011

Yesterday FOMC announces FED will buy long-term bonds while sell short-term ones. The intuition result is “OK, long-term bond yield will go down and short-term bond yield will go up”. So is that the case?

I spent some time to study the yield change during the previous FED actions (QE & QE II). By comparing the notional amount in POMO and yield for maturity of 5 yrs, 10 yrs and 20+ yrs, I found something interesting.

Let’s look at the 5 yrs case (10 yrs and 20 yrs cases are similar and graphs are shown in the bottom):

 

We may notice that at the beginning stage of the QE (I and II), the yield went up as Fed was buying.   While on the other hand, the yield went down with QE  close to the end. Em. Interesting. So the intuition of price going up when Fed is buying is totally wrong. The real world is much complicated.

Why did that happen?

The real reason could be very complex. I can only put my 2 cents here:

  1. When FED announced the QE, he not only provided the real liquidity but also the expectation of end of trouble. Risk appetite is therefore back and ppl sold less risky Treasury notes while bought risky ones (commodity, stock, etc).
  2. Cash is king when liquidity issue happens. When ppl knew FED was going to buy their T-Notes, the sellers all came to mkt and were eager to sell them to FED and get cash. Therefore, at the beginning  stage of QE, yield actually went up (T-Notes price went down). Later, after all the sellers have already sold their stuff, there are less and less sellers out there. Meanwhile, with the worrisome about the global economy rose when QE was close to the end, more and more buyers appeared. Hence, the T-notes were bid up in the end.

Well, this time may be a little different. The reason 1 is no longer true as no new money is created yesterday. The liquidity issue is not solved and in fact might become worse. But reason 2 may be still valid. Again, as FED buys the long-term bond, its yield can actually become higher gradually.

On the other hand, we may not apply the same logic to the short-term notes here. The intuition of short-term yield going up may be true. The difference here is FED is selling the short-term notes while buying the long term bonds. When he is selling, FED is actually withdraw liquidity from the mkt buy collecting cash. Do we expect ppl will give out their cash for T-notes when everyone is after cash? Well, I don’t think so.

Bond at low yield

11 Sep
2011

We know when buying bond, you get the return from coupon payment plus the P/L from price change. Let’s ignore the risk side (default, downgrade) for now. It seems reasonable why ppl want to buy bond when it has high yield as it gives good return on coupon, plus a potential good return if price also goes up. But when yield is low, does it mean it will have less buyer?

It seems not. The following is the yield of the US 30 years’ bond. It is currently at yearly low and lower low seems just be ahead. That means it still has lots of buyer. So why?

Besides the reason of risk-aversion, I think another reason can be seen from the simple bond-yield relation. The duration at low yield is higher than it at high yield. That means the P/L at low yield is bigger given same yield change. If I am a speculator and believe yield will go lower, I will buy bond even it already has very low yield. At this stage, the potential profit (in a short time) from yield going lower is high.

That said, if I am an investor, I won’t buy and hold. Bond has a theoretical max value, so the growth potential is limited.

Hello world!

12 Aug
2011

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