The IMF developed an econometric model from economic fundamentals such as disposable incomes, demographic trends, and mortgage credit for the period 1993Q1 to 2009Q2. It then used the model to compute equilibrium prices for housing in the five largest provinces.

The IMF study also looked at traditional valuation measures. At the end of June (before the recent spurt in prices), the house-price-to-income ratio was about 15% above its historical average (U.S. close to its historical average); the house-price-to-rent ratio was about 60% above its historical average (twice the U.S.).

The study mentions several factors that help to support house prices, They include:

• revival in commodity prices
• lenders have full recourse to borrowers which makes escaping loans harder (unlike U.S.)
• loan-to value requirement of 80% for uninsured mortgages
• mortgage-backed securities represent 20% of the market in Canada (third of the U.S.)
• government initiatives such as buying up mortgage-backed securities, expanding the Canada Mortgage Bond program to 10-year maturities, expansion of CMHC programs and a temporary home-renovation tax credit.

From trough to peak during the boom period, new house prices were up 97% in Alberta, 120% in Saskatchewan, and 41% in the rest of Canada. Existing house prices showed similarly huge increases during the run-up phases.

Highlights include Dominique Strauss-Kahn, managing director of the International Monetary Fund, scolding leaders of the developed countries for promising to cleanse the balance sheets of their financial institutions with some haste, and then (to his mind) dragging their heels. He went so far as to say they’d done nothing—an overstatement he rather quickly retracted. But he stuck to his guns that the process of getting the toxic assets out in the open was “much too slow… There are lots of losses that have so far not been exposed.” (The IMF puts “lots” at about $500 billion.”)

Something of a debate that emerged in the forums this morning was the question of why, if “the worst of the banking crisis is behind us” (a phrase tossed about repeatedly), credit flows remain impaired. In other words, if the banks really are on a sounder footing again, why don’t they start doing their job and lend more money?

The most lucid answer came from Jan Hatzius, chief US economist for Goldman Sachs. (Hatzius was among the few economists to correctly call the widespread effects of the US housing bust.) His reply to the question of impaired credit flows? Lack of demand.

Banks are not lending money because the private sector is not borrowing it. For instance, U.S. consumer spending in the second half of ‘08 fell by 4%—a huge drop in a short period of time. Consumer borrowing is falling and the U.S. savings rate, which had been negative for years, is positive and rising. So it’s not that there isn’t money to borrow anymore. Lack of credit supply was a “2007/08 issue,” Hatzius said. “Demand for credit is an ‘09 issue.”

Hatzius, who by the way came out on top of the Wall Street Journal’s economic forecaster rankings for ‘08, was more upbeat (in his way) about the US dollar. He said that he thinks concern over a “deluge of debt” undermining the U.S. Treasury is “overblown.” He pointed out that the US trade deficit has shrunk sharply in a very short period of time, so effectively private sector savings are funding the debt expansion in the States.

The economist was downright upbeat about Asia, however. When it comes to China, Hatzius said he tends not to rely on statistics solely out of China as they are hard to decipher or rely upon, but he does look at other Asian economies, like Korea’s. And “there’s no question that the Asian countries are coming back.” He suggested, in fact, that a classic V-shaped recovery is occurring in Asia right now, even as the West is waiting for the recovery to start.

Look for that around the end of the year…

With today’s revelation, China is now the fifth-largest holder of gold by country, surpassing Switzerland, Japan and the Netherlands. It is the seventh-largest holder of gold in the world, with the International Monetary Fund and the SPDR Gold Trust exchange traded fund holding more. China is the world’s largest producer of gold.

China is expected to buy more gold with its almost $2 trillion in savings as it builds reserves and tries to build the country’s buying power. With the IMF’s decision last year to sell 403 tonnes of gold from its holdings, this could be an opportunity for China to boost its gold holdings quickly. IMF gold sales, however, need ratification from its member countries, including the United States.

With the suspicion confirmed that China has been buying gold and will likely continue  to do so this just adds to the gold bug’s case for investors to continue to flock to the safe-haven metal.

It was predictable that the G20 nations would voice a resounding no to protectionism, but like TD’s Craig Alexander asks in a story I wrote yesterday, does this just mean no to tariffs or will other protectionist measures, like the Buy American clause in the U.S. budget, be abandoned as well?

It’s tough to tell how far the anti-protectionism sentiment will go after hearing what Stephen Harper had to say about this issue.  He told reports in London that protectionism is “the greatest risk to the economy, and I’m not going to tell you it’s solved.”

There are, in many cases, very good arguments for [protectionist demands].

They will assist certain industries, sectors, and even individual companies, but they will do so at the expense of the wider economy and at the risk of a general drift in this direction globally. We absolutely must avoid that. All leaders are agreed to that.

According to a CBC story, he was then asked about auto industry bailouts, which the World Bank says is a protectionist measure. He said that he “agreed there are risks in that regard.”

Barack Obama told reports that they have “rejected the protectionism that could deepen this crisis. … This cooperation between the world’s leading economies signals our support for open markets.”

So we’ll have to wait and see what this all means, but it sounds like Canada should still be concerned.

Regulation was also a major theme at the G20 and some ground was made there, mainly that hedge funds will come under a global regulatory framework. The Financial Stability Board, as it’s been dubbed, will be made up of G20 and European commission members.  It’s still unclear how they will police hedge funds, but we’ll get more details soon enough. (The Alternative Investment Management Association has already decried this move saying the hedge fund industry is being used as a scapegoat.)

Oh yeah, and that $1 trillion dollars that’s going to the IMF to help out cash-strapped countries? Everyone seems to be on board with that huge figure, even France and Germany. I’m not sure what Canada’s share of all that money will be, but when I find out I’ll let you know.

UPDATE: Just received a press release from the PM’s office. It revealed that Canada would contribute $10 billion to the IMF, and other $200 million to the International Finance Corporation’s global trade liquidity program.

Read more:

CBC – Deal part of ‘unprecedented’ response to crisis: Harper
Prime Minister Stephen Harper spoke out against protectionism Thursday and said the agreement reached at the conclusion of the G20 summit in London was a “remarkable statement” that should give financial markets “an awful lot of confidence.”

BLOOMBERG — G-20 Backs Regulation Crackdown, $1.1 Trillion Aid
World leaders agreed on a regulatory blueprint for reining in the excesses that fed the worst financial crisis in six decades and pledged more than $1 trillion in emergency aid to cushion the economic fallout.

CNN – G20 pumps $1 trillion into beating recession
British Prime Minister Gordon Brown heralded the emergence of a “new world order” Thursday as the G-20 issued details of an “unprecedented” package of measures to tackle the global economic crisis.

It’s not over yet, but word from London is that the governments have pledged more than $500 billion to the International Monetary Fund so it can offer more loans to struggling countries.

According to a CBC article, a lot of that dough would come from China, which in return would be given more say on the IMF.

One hot button issue this year was stimulus funding. Most countries have offered a first wave of rescue dollars, but some — France and Germany specifically — have been resistant to dole out more cash. They want more regulation instead. That’s frustrated the U.S., who see stimulus spending as a main way to get the global economy moving again.

It was pretty clear that France and Germany wouldn’t budge on this point, and they’ve since made it official.

From the CBC story:

Leading into the meeting, French President Nicolas Sarkozy and German Chancellor Angela Merkel refused calls for more government spending and said Thursday’s meeting must take concrete steps on tougher financial regulation. Sarkozy has previously threatened to walk out of the meetings rather than agree to a”false compromise.”

France and Germany have also reportedly persuaded the other leaders to back tougher language on stronger financial regulations to avoid a repeat of the current crisis.

Leaders were moving “slowly together” on the regulation issue, a French official told the Associated Press on the condition of anonymity.

So we’ll see what the official comment is at the end of the meeting, but here’s what’s happening so far.

Anyone want to weigh in on what they think should come out of the G20? Comment below.

Last year, the IMF approved the sale 403 tonnes of gold—it has 103.4 million ounces and is one of the largest holders of gold in the world—in order to create an endowment and put itself in a better financial position. In the past, the IMF has said gold sales would be made under the central bank gold agreement to avoid disruption of the market.

The sale of gold by the IMF can take several months because it requires ratification by member countries. Thus, its plans to sell gold won’t be part of any near term plan to help with the economic crisis. An overview of the IMF’s policies on gold can be found here.

Since I’m a new blogger on Canadian Business Online, I thought readers might be interested in checking out some of my articles.  Here are a few from recent issues of Canadian Business:

April 13, 2009:  Business Fraud:  Two bad pennies
March 30, 2009:  The good, the bad and the ugly: The magnificent seven
March 30, 2009:  Emerging Markets:  The Brazilian play
March 16, 2009:  Investing:  Into Africa
March 2, 2009:  Recession strategy:  The playbook
March 2, 2009:  Visionary leaders

What’s a bit surprising is the number. There were 124 “systemic banking crises” spread across dozens of countries between 1970 and 2007 (see appendix).

A downer is the average fiscal cost (cost of government bailouts) of the crises. “Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP, and can be as high as 55.1 percent of GDP,” note the authors. The $1 trillion (U.S.) estimate bandied about for the U.S. financial crisis seems gargantuan but is still far below 13.3 per cent of U.S. GDP. Could the final cost end up being even more monumental?

Also on the depressing side are the output losses due to systemic banking crises. The IMF document says they have “averaged about 20 per cent of GDP during the first four years of the crisis, and range from zero per cent to a high of 98 per cent of GDP.”

Interestingly, “there appears to be a negative correlation between output losses and fiscal costs, suggesting that the cost of a crisis is paid either through fiscal costs or larger output losses. Furthermore … even in the absence of significant government intervention, fiscal losses may be large due to tax revenues forgone because of higher output losses.”

Appendix: Canada was one of the few countries not to appear on the IMF list. An oligopolistic industry does have its advantages, it seems. Could lower levels of competition mean less pressure to lower credit standards?

But wait for it. When the dollar fell 30% in real terms from 1985 and 1991, the trade balance went from a deficit equal to 3.5% of GDP to approximately balance. This time around oil prices have climbed and masked some of the reduction. And most of the dollar depreciation since 2002 has come in the second half of the period (converse of earlier devaluation) — so much of the effect is still to be felt (given long lags of up to two years in the impact of exchange rate changes).

Extrapolating from the 1985 to 1991 experience, John Lipsky, First Deputy Managing Director of the International Monetary Fund (IMF), expects the U.S. trade deficit will decline in coming years to under 3% of GDP. For investors, this means a promising asset class going forward could be U.S exporters. As Lipsky said: “If the decline in the value of the dollar is supporting a narrowing of the … U.S. current account deficit, it is thereby helping to promote an inevitable shift in the sources of growth between tradable and non-tradable sectors in both surplus and deficit economies.”

Overall, we got the thumbs up from the IMF for having a “mature, sophisticated, and well-managed” system. But, as mentioned above the international organization had a few suggestions for improvement including increasing transparency for some structured finance products, in light of the non-bank sponsored asset backed commercial paper debacle.

You can find the federal government’s response to the report here.