Canadian condominium construction has surged but population growth has kept oversupply in check, the federal housing agency said in a report on Wednesday that also showed declining mortgage arrears and high home-equity levels.

In its annual report on the housing market, the Canada Mortgage and Housing Corp pointed to steady levels of mortgage debt and an increasing number of households as evidence that residential real estate is in good shape, despite warnings from observers that the market is overheated.

Canada’s housing market avoided the crash experienced in the United States five years ago due in part to more conservative lending standards and a stronger economy. While economists have long predicted an eventual correction in Canada, they are divided over whether prices will drop sharply or simply stagnate in a so-called soft landing scenario.

“The main argument here is just that the Canadian housing market still looks fairly normal,” said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

U.S. housing starts surged to their highest level in nearly six years in November, a sign of strength in the housing market that could give the Federal Reserve ammunition to start cutting back its bond purchases.

The Commerce Department said on Wednesday housing starts jumped 22.7 percent, the biggest increase since January 1990, to a seasonally adjusted annual rate of 1.09 million units.

That was the highest level since February 2008 and only the second time since the collapse of the housing market in 2006 that starts rose above a 1 million-unit pace.

The department also said groundbreaking increased 1.8 percent in October and slipped 1.1 percent in September. The release of housing starts data for September and October was delayed because of a 16-day shutdown of the federal government in October.

Economists polled by Reuters had expected starts to come in at a 950,000-unit rate in November and set a 915,000-unit pace in October.

The report was released as Fed officials met for a second day. The housing market had slowed in recent months, a development policymakers acknowledged at the October meeting.

Some economists expect the Fed to announce a reduction in its $85 billion monthly bond buying program later on Wednesday, although more believe it will wait until January or March.

A run-up in mortgage rates, in anticipation of the U.S. central bank tapering its monthly bond purchases, took some edge off the sector’s recovery earlier in the year, but not enough to halt the process as a steady increase in household formation from multi-decade lows props up demand.

Last month, groundbreaking for single-family homes, the largest segment of the market, soared 20.8 percent to a 727,000-unit pace, the highest level since March 2008.

Starts for volatile multi-family homes jumped 26.8 percent to a 364,000-unit rate.

Multi-family starts have risen strongly through the course of the housing recovery, buoyed by demand for rental apartments as still-high unemployment and stringent lending practices by bank price potential homeowners out of the market.

While permits to build homes fell 3.1 percent in November to a 1.01 million-unit pace, they were above economists’ expectations for a 990,000-unit pace.

The drop in permits last month is likely to be temporary. Homebuilder confidence rose in December, with builders upbeat on current sales conditions, future sales and prospective buyers, a report showed on Tuesday.

In addition, the stock of houses on the market remains lean and the inventory of homes under construction is at a 4-1/2 year low.

In November, permits were weighed down by a 10.8 percent drop in approvals for the multifamily sector. Permits for single-family homes rose 2.1 percent.

(Reporting by Lucia Mutikani; Editing by Krista Hughes)

Today is the big day (2pm EST)

Investors are on the edges of their seats, waiting to find out what the Fed will do.

Taper? No taper? Or maybe it will taper on the tapering off?

Our guess is the Fed will not commit to a serious program of reducing its support to the bond, equity and housing markets.

It’s too dangerous.

Ben Bernanke – the man who didn’t see the housing crash coming – won’t want to see the stock market collapse just before he leaves office. He’ll want to go out on a high note…

…and that means guaranteeing more liquidity.

Investors don’t seem worried. Monday, the Dow rose 130 points. Gold was up $10 an ounce.

Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising.

Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence.

How much do investors love the US?

Let us count the ways:

1. GDP per capita is running 7% – ahead of where it was in 2007. Among the world’s major developed economies only Germany can boast of anything close. All the rest are falling behind.

2. The budget deficit – which was running at about 10% of GDP – is now down to just 4% of GDP.

3. Unemployment is going down, too. Heck, just 7 out of 100 Americans are officially jobless. Didn’t Bernanke say he would tighten up when it hit that level?

4. And look at prices. Consumer price inflation is running at just 1% over the last 12 months. No threat from inflation, either.

Statistical Folderol

But wait…

What if all these things were delusions… statistical folderol… or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along?

Well, dear reader, you surely expect us to tell that the US economy is a hidden disaster… and we won’t disappoint you.

GDP? Carmen Reinhart studied the performance of rich economies following a financial crisis. Her paper, “After the Fall,” showed that, six years after a crisis, per capita GDP was typically 1.5 percentage points lower than in the years before the crisis. But in the US, per capita GDP growth is running 2.1% lower than its pre-crisis level – significantly worse than average.

Deficits? Super-low interest rates have helped debtors everywhere. “Never have American companies brought a greater share of their sales to the bottom line,” writes Bill Gross. How did they do that? Largely by taking advantage of the Fed’s interest rate suppression program. But hey, the US government is the world’s biggest debtor. It is the primary beneficiary of the Fed’s miniscule rates.

That’s part of the reason why deficits are low. Let the yield on the 10-year T-bond return to a “normal” 5%, and we’ll see deficits soar again. (Interest payments, under this scenario, would add an additional $360 billion a year to the deficit.)

Besides, it’s not only the deficit that counts. It’s also the total level of debt… and particularly the debt financed with funny money from the Fed.

Only twice in US history has the ratio of US Treasurys held at the Fed gone over 10% – once in 1944 and again today. The first time, it was a national emergency: World War II. Now, the Fed is merely fighting to protect a credit bubble.

Inflation? Yes, consumer price inflation is low. But what that shows is that real demand is still in a deleveraging trough. The money multiplier – the ratio of money supply to the monetary base – collapsed in 2008. It has not come back. Neither has the economy.

Unemployment? The rate has been doctored by removing people from the labor pool. The workforce is now smaller – as a percentage of the eligible pool – than at any time since 1978.

Besides, what is important is not the rate, but what people get from employment. On that score, it is a catastrophe. According to a Brookings Institution study, the average man of working age earns 19% less in real (inflation adjusted) terms today than he did during the Carter administration!

A Strange Kind of Recovery

What kind of economy is it that reduces a man’s wages over a 43-year period?

We don’t know. But it’s not likely to win any prizes.

But why, with so many strikes against it, does the US economy still have the bat in its hands?

It’s partly because the Fed has pumped up stock, bond and house prices – not to mention net corporate profit margins (by reducing the interest expenses on corporate debt) and consumer spending (through entitlement programs funded through the Treasury with ultra-low interest rates). So, the averages look pretty good… and they mask the ugliness beneath them.

The rich got richer on the Fed’s EZ money. But the average “capita” is actually poorer.

The bottom 90% of the population – people in 9 houses out of 10 – have 10% less income than they had 10 years ago.

This is not a success story. It’s a disaster. And not one that tempts us into an overvalued US stock market.

Regards,

Bill

P.S. This is also the conclusion of our investment team at Bonner & Partners Family Office,the family wealth advisory service we set up with our eldest son, Will. We’ve received a number of enquiries about how to get access to our research. We’re not accepting new membership applications right now. But Will is considering making some places available to Diary readers. So look out for more on that soon.

The cost of living in the U.S. was unchanged in November from a month earlier, showing inflation is making scant progress toward the Federal Reserve’s goal.

No change in the consumer-price index followed a 0.1 percent decrease the prior month, a Labor Department report showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.1 percent advance. The coremeasure, which excludes food and fuel, rose 0.2 percent.