The Landing will NOT be soft - Housing Bubble

Despite Heavy Borrowing on Gains, Americans Deny Real Estate Values Affect Personal Spending
Thursday September 29, 10:59 am ET

Trend Raises Fear of Spending Slowdown if Housing Prices Stagnate

ORLANDO, FL, Sept. 29 /CNW/ - Despite fears in the marketplace about a U.S. housing bubble, the majority of homeowners (nearly 60 per cent) expect the value of their homes to increase by at least five per cent annually during the next several years, according to an online survey of 1,001 American consumers released today by RBC Capital Markets, the corporate and investment banking arm of RBC Financial Group (RY: TSX and NYSE). In fact, a quarter of those respondents (24 per cent) even said they expect annualized gains of 10 per cent or more over the next few years. Conversely, a scant three per cent of respondents expect their home values to decline over the next few years.
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The findings were released today at the RBC Capital Markets Consumer Conference, which was attended by over 250 institutional investors and retail executives from across the nation.

In addition, 85 per cent of homeowners responding experienced real estate gains over the last three years and over 70 per cent experienced gains in excess of 10 per cent during this timeframe. However, only 10 per cent of the respondents believed that rising home values had affected their spending habits. Further, over half of those surveyed firmly disagreed with the notion that real estate gains impacted their spending even though half of all respondents (51 per cent) either sold their home or borrowed against their home equity in some fashion. Ironically, those that disagreed most with the idea that real estate gains had impacted their spending were those in higher income brackets (defined as those making over $100,000) and those that had already experienced the biggest real estate gains. Ultimately, these two groups were also the most aggressive in extracting equity (approximately 65 per cent).

"Not only are most people expecting big real estate gains to continue, the vast majority of people don't believe these gains have impacted their spending. These opinions run contrary to most data in the marketplace regarding the real estate wealth effect," said Scot Ciccarelli, managing director, Equity Research at RBC Capital Markets. "We believe these findings raise a major question. In our minds, the question is whether people have spent more freely than they otherwise would have because of their real estate gains and don't even recognize it. If that's the case, a simple slowing of real estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns."

Further, just over 60 per cent said rising gas and energy prices were already causing them to cut back on their spending. Not surprisingly, the impact has been more heavily skewed towards the lower income brackets (under $50,000) than those in the higher income brackets (over $100,000). "Rising energy prices are essentially creating a flat tax that is affecting lower income consumers at a disproportionate rate and supports anecdotal evidence in the marketplace over the past two years that companies more levered towards higher-end consumers have largely outperformed those that cater to lower-end consumers," said Ciccarelli.

Finally, by a two to one ratio, people are more positive about their personal financial situation than they are on the broader economy. On average, just under 40 per cent of respondents were optimistic about their personal financial situation and just over 30 per cent were concerned or pessimistic. On the flip side, however, only 20 per cent of the respondents were optimistic about the broader economy while just over 50 per cent were concerned or pessimistic about the economy. Not surprisingly, those that were the most optimistic about their personal financial situation were those in the upper income categories and those that had experienced the biggest real estate gains. "This outlook seems to cut to the heart of the American consumer. People seem to be conscious of the macroeconomic headwinds facing them like rising energy prices, the War on Terror, and the growing federal deficit and the impact it can have on others.

However, they are less inclined to believe they can be affected by these same factors. Ultimately, it is this optimism that keeps the US spending engine in tact," said Ciccarelli. "While energy prices are certainly disconcerting, it is this real estate wealth effect that we are most concerned about and should be the primary focus of investors."

The RBC Capital Markets survey was conducted during the week of September 19, 2005, and included 1,001 online respondents. Stamford, Connecticut-based InsightExpress assisted RBC Capital Markets in the survey. The margin of error for the survey was plus or minus 3 per cent.

About RBC Capital Markets

RBC Capital Markets is the corporate and investment banking arm of RBC Financial Group, the global brand name of Royal Bank of Canada (RY: TSX and NYSE). The firm is Canada's leading underwriter of debt and equity securities and ranks among the top 10 M&A advisors in North America. It offers institutional clients a global reach in selected products and industry sectors with a strong focus on U.S. mid-market companies. For additional information, please visit: www.rbccm.com.

About RBC Financial Group

Royal Bank of Canada (RY: TSX and NYSE) uses the initials RBC as a prefix for its businesses and operating subsidiaries, which operate under the master brand name of RBC Financial Group. Royal Bank of Canada is Canada's largest bank as measured by assets, and is one of North America's leading diversified financial services companies. It provides personal and commercial banking, wealth management services, insurance, corporate and investment banking, and transaction processing services on a global basis. The company employs approximately 60,000 people who serve more than 14 million personal, business and public sector clients through offices in North America and some 30 countries around the world. For more information, please visit www.rbc.com.

For further information

Constance Hubbell Clapp, The Hubbell Group, Inc., (781) 878-8882, hubbell@hubbellgroup.com
Loretta Healy, The Hubbell Group, Inc., (781) 878-8882, lhealy@hubbellgroup.com




It's interesting that 19% of the US population prior to the last election believed they were in the upper 2% income bracket. This is probably largely due to the fact that Democrats did not mention that you have to average an income of $20,000 per month to be in that bracket.

Over the last few months I have had several requests for loans by people wanting to borrow money in order to pay their mortgage and get them "by" in addition to eliminating the credit card debt they eliminated the last time they took out a loan.

Fairly soon the US will owe twice what we have ever owed - thats double the Regan debt which was about 5 times any previous administration.

From my perspective its like a bunch of people in a building during the rise of a ponzi scam - know one thinks the roof will fall on them.