Larry’s Party

As Larry Pollock himself put it, there was some irony that he was being honoured as Alberta’s Business Person of the Year the same day that his fellow bankers on Wall Street were being hauled before Congress and whacked with a new “Financial Crisis Responsibility Fee.”

But then, as associate editor Scott Messenger wrote in his profile of the now 20-year Canadian Western Bank CEO in December, Pollock has a different style to the so-smart-they’re-stupid architects of the 2008-09 financial collapse. Some snippets of homespun wisdom from Pollock’s luncheon speech on Jan. 14:

(On his introduction to the financial industry as a collections agent) “If you’re going to lend money you’ve got to learn how to collect it.”

(On CWB’s growth) “We now make in three days what we made in our first year.”

(On avoiding shaky financial instuments like asset-backed commercial paper) “I don’t think there’s any substitute for capital and liquidity.”

(On human resources management) “You’ve got to have loyalty both ways. The company should be loyal to the employee.”

(Self-explanatory) “Customer service is not a department. It’s an attitude.”

(On the social role of corporations) “Companies are what really makes a community go.”

(On finding the right career) “Balance your lifestyle to your income, not the reverse.”

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The question I’m asked most often these days (go figure) is what is going to happen with interest rates in 2010 and, more specifically, should I stick with the variable rate mortgage or lock in at 4%? If only I knew. It doesn’t take a clairvoyant, however, to observe that today’s “free money” – my variable-rate mortgage is now at 1.65% – is unsustainable.

So I put the question to some of the brain trust at CWB’s mortgage group, several of whom shared my table at the Business Person of the Year luncheon. They predicted a 100-basis-point increase in the next 12 months, and as little as two years before the variable mortgage rate surpasses today’s 4% five-year fixed rate.

So whether to lock in now depends on your risk tolerance. Could your budget withstand 18 months of 6-7% rates at the end of your term (remember, by that time the fixed rate will be no better)? If so, stick with the variable; historical statistics always favour those who take on the risk themselves. If it can’t, lock in now.

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Speaking of mortgages, is there a housing bubble in Canada or not? Certainly the feverish resale activity seems to run counter to what’s happening in the rest of the economy.

However the Canadian Association of Accredited Mortgage Professionals came out with a survey (click on the “Canadian Mortgage Market” pdf) on Jan. 14 that suggests even if the recovery falters, Canadian homeowners are not about to hit the wall. Eighty-six per cent of buyers still choose a fixed-rate mortgage, meaning they are insulated from any sudden interest rate increases that would push them over the edge. Today’s buyers aren’t maxing out their creditworthiness either, choosing instead to borrow less than lenders will allow them.

We also don’t have the conditions that aided the U.S. housing collapse: subprime mortgages and those with introductory 0% interest rates, not to mention mortgage interest tax deductibility. In the U.S., there were many more homes built than there were households to occupy them, whereas in Canada, the overheated Toronto and Vancouver markets are characterized by more than 100% occupancy – a large percentage of homes have secondary (often illegal) suites that means there are actually more households than officially counted homes.

Finally, there is the question of what you call a bubble. When the dot-com bubble burst in 2000-01, companies went from billions of dollars in valuation to bankruptcy. Yet even in the worst-hit housing markets in the U.S., such as Las Vegas, resale prices dipped by maybe 30% over the last few years. That isn’t the sound of a bubble bursting.

The fact is housing is useful. People always need a place to live. Now gold, that’s not useful. The jewelry market consumes less than 10% of the gold supply; the rest is stockpiled. I’m more inclined to say there’s a bubble in gold forming than in houses.

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Talk about timing: shale-gas producer Apache Canada’s purchase of a controlling stake in the Kitimat LNG natural gas export terminal took place the day after we assigned a story for our Oil & Gas Industry Report for the April issue on the gas industry’s imperative to develop new markets given the massive increase in North American reserves locked in shale. Apache chose the Asian market. EnCana is pushing gas as a transportation fuel with a proposal for a network of natural gas fuelling stations along the Quebec-Windsor corridor. Still others are pushing gas as a substitute for dirty-burning coal in the power generation sector. Read all about it in April.

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