CREA stats and condo rule changes

CREA releases December sales data

I’m just on my way out of town for the weekend, so this post will be missing much of my usual commentary.

I will draw your attention to CREA’s final December sales numbers which were released today:

Resale housing market solid in December

Nothing much to get either the bears or the bulls excited in this report.  Home sales registered 14% lower than 2009 and dropped on month-over-month basis for the first time in four months.  Sales registered only slightly below the 10 year average.

New listings remain sparse.  Evidently buyers are still reluctant to relist until they see a sales rebound.  There was a slight increase in new listings, up 0.6% over November. Months of inventory remained unchanged at 5.8.

Average price finished December up 4.2% (2.1% median), but month-over-month prices fell 0.3% seasonally adjusted.  Additionally, the trend in sales-to-new listings rolled over and turned negative for the first time since May.

Said Gregory Klump, chief economist at Crea:

“Sales may be starting to plateau in some of Canada’s most active and expensive housing markets.  Combined with a pickup in new listings and further interest rate increases, the stage is being set for smaller price gains and a further deceleration in the growth of mortgage debt.”

Just how much of a deceleration is the big question.  Certainly inventory is hiding in the wings.  Without a rebound in demand, expect downward price pressures on a year-over-year basis through 2011.

Condo rule changes?

Interesting article today in the Post:

Tougher condo mortgage laws may be on the way

“The federal government’s efforts to get tough on borrowing are now focused on the condominium sector, with new rules in the works to make it more difficult to qualify for a loan on a high-rise apartment, the National Post has learned.”

“Sources say rules now being discussed would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage. Currently, only 50% of the fee is considered. The move has the potential to squeeze thousands of consumers out of the market.”

“It is almost a guarantee that the government will once again lower the maximum length of amortizations for a mortgage, down to 30 years from 35”

The rest of the article is quite interesting as it explores the impact this rule change would have on some of the country’s larger condo markets.  As I’ve said before, the Toronto condo market in particular looks ripe for a fall.

Perhaps this has not been lost on Mr. Stephen Dupuis, chief executive of the Toronto-based Building Industry and Land Development Association, who made the following statement:

“There seems to be a fatal obsession with real estate and engineering the real estate market which may be an unhealthy obsession.”

I agree there’s an unhealthy obsession with real estate, but I think we have different interpretations of that statement.  Of course the second part of that statement is referring to ‘engineering’ a return to more normal lending standards as were the norm during the 60+ year history of CMHC.  To someone who works for a land development association, this would seem ‘unhealthy’.  Taxpayers and first time home buyers might have a different perspective on tightening requirements for mortgage insurance backed ultimately by the taxpayers and offered to private, profit-seeking institutions.

I for one welcome any change that would stem the tide of loosening credit requirements and finally begin to rein in Canada’s growing credit bubble.

Cheers

Ben

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41 Responses to CREA stats and condo rule changes

  1. Jordan says:

    The building industry representative’s comments are reminiscent of the apparent letter-writing campaign by CREA that is trying to persuade Flaherty not to make any changes to the minimum mortgage lending standards.

  2. debunking says:

    Have faith in our goverment. It will always be there to prop up our RE market. As soon as real estate starts to slow down, the goverment will start making some noise about changing the rules and people will start again and again buying more houses to beat the new rules. Buy before the new rules come into force in September 2011. Then come spring 2012, some more goverment made new rules will be thrown out, wash , rince , repeat. This sucker aint going down soon.

    • ATP says:

      Simple question: Has Ben Bernanke and Barack Obama been able to reverse the falling trend in house prices in the US with TARP, QE-1, QE-2, etc.?

  3. mac says:

    Debunking, you’ve got my vote. The whole thing is engineered to stay up. They can’t keep it up but they can do a damned good job of keeping it flat. Over here in Vancouver, our biggest real estate agents publicly back politicians and people infer, from that, what their house prices will do and who they should vote for.

  4. don says:

    sorry debunking government can delay the decline but ultimately fundamentals will win out

  5. debunking says:

    Like I have said before, we underestimate how long it might take for the prices to come down, if ever.
    We cannot be compared to the US, despite how much we dislike them, US is still a free market economy (a bit less nowadays, but still…) whereas in our Canadian economy government has tight control over almost each aspect of our economic life, therefore it is much more able to exert influence.

    I think that our economy is much more similar to Australia in most aspects (resources, Asians etc), and if you look at real estate there, you will find exactly the same pattern of RE development.
    People have been claiming for the imminent crash just as here, for years, for reasons we have heard ad nauseum from already. Now mortgage rates in Australia are north of 8% and have been there for almost 2 years, and still no crash on the horizon.
    With our mortgage rates at 3%, we have a very long way to go before there are some strains on the RE if we take Australia as an example.
    And this does not factor in our government intervention at all. Our government will never let real estate fall, first because 70% of Canadians are owners and vote, and if they did, they will lose their next elections.
    Second, because of CHMC, if we did let real estate fall, we would be still left with the bill. So, someone tell me, why would any government make such a stupid move, when they can borrow so cheap on the international bond market (actually cheaper than the US) and have almost limitless borrowing power or printing ability?
    I firmly believe that if RE starts to crash, first CHMC will start to insure 0% down 40 years or more mortgages, government incentives shall be granted to first time buyers, mortgage interest could become deductible, various home credits could be reinstated, etc etc,. If you were the government, you too would precisely do that since you have insured all the mortgage mess, why on earth would you let it fail?
    People underestimate the power of government with monopoly power over money printing. We could stagnate for years, while inflation creeps up slowly and maybe in 20 years home prices and wages will be again fundamentally aligned. We have already started on this path, our inflation is 2% and a bit more, yet the central bank keeps the interest rate at 1%.

    • Chad in Burnaby says:

      debunking: “People underestimate the power of government…”

      ATP: “Simple question: Has Ben Bernanke and Barack Obama been able to reverse the falling trend in house prices in the US with TARP, QE-1, QE-2, etc.?”

      debunking: your response?

  6. don says:

    Just out of curiosity debunking why has the canandian government let it crash in the past

  7. mac says:

    “We could stagnate for years, while inflation creeps up slowly and maybe in 20 years home prices and wages will be again fundamentally aligned. ”

    Debunking, I’ve tried to float this idea by bears and bloggers here and they’ll have none of it. That’s too bad because they can’t see that government policy coupled with commodities prices, immigration policy (which is also government policy), a huge shift in economic power from Western democracies to less-kind governments with a populace looking to get their money out-of-country, inflation, plus a positive unforeseeable or two MAY be all it takes to keep prices flat as you say.

  8. mac says:

    As proof of Debunking’s theory: I hear the changes on the horizon for the CMHC may be as little as increasing down payments to 6% or 7%. That’s a far cry from 20/25. Someone is considering current home values.

    • Brett says:

      I understand where you guys are coming from when you say that the government will try to not let the housing market crash, and if it starts they will definetly try with everthing they have. However mac and debunking, you guys are forgetting that at the end of the day it isn’t up to the government, its up to the people of Canada. If the people see that buying a house isn’t a good purchase anymore, than they won’t buy houses, no matter what the government does. The government can’t MAKE people buy houses. Even if they crash rates again, give out buyer credits, loosen mortagage standards, if people start to get into the mode of thinking that prices are going down and houses are a bad investment, a downward spiral begins.

  9. debunking says:

    @ Chad
    “Simple question: Has Ben Bernanke and Barack Obama been able to reverse the falling trend in house prices in the US with TARP, QE-1, QE-2, etc.?”

    Read my post above, there is no point in comparing Canada with the US; there are different dynamics in each economy. CHMC guarantees almost 100% of all mortgages and there are only 5 banks that control most lending in Canada compared to 8000 banks in the US. Our government has extreme leverage through the 5 big banks and the CHMC, so please stop comparing us with the US. The US real estate peaked in 2006. Traditionally, we lag the US about 2 to 3 years economy-wise.
    Why hasn’t our bubble popped 5 years later?
    Because CHMC and our 5 big banks were extremely effective in inflating it.
    There is no reason to believe that they can’t keep this going for the foreseeable future, they control the whole market anyway and take the orders from the government. This is not the case in the US.
    Can you elaborate on the events that might happen, that would leave our government with no choice but to let RE crash?
    I will be glad to elaborate on what the government will do to counter such a crash or events.

    @ Bret
    “The government can’t MAKE people buy houses.”

    You are so wrong! What do you think CHMC has been doing the last 20 years?
    In absolute, the government can’t compel you to buy a house, but we are all born with a short position in housing.
    You have to live somewhere, and if there were the right incentives, (tax deductions, credits, etc) everybody will buy rather than rent. It is common sense. Furthermore, Canada does not have a renting culture developed as in Europe. There is a stigma attached to renting. Being a renter myself, I know it sucks, especially if you have a family and kids, it is very difficult to find a good accommodation at a reasonable price for long periods.

    This is to say that I am not a RE bull, I find the housing very expensive right now in Canada.
    But this does not mean that because housing is expensive prices are going to crash. Tha is called wishful thinking. People hoping that the government will pop the bubble are completely deluding themselves.
    My main scenario is high inflation in most things for 10 to 20 years with house prices lagging inflation during this period. This will eventually bring prices in line with incomes. It has happened before in many western European countries (Germany, Belgium, and Holland). It is the best way the government and the central bank can engineer a smooth landing without too much shock to the economy. And they will try and most probably succeed.
    I would like to hear the reasons why this cannot happen.

    • HHV says:

      “CHMC guarantees almost 100% of all mortgages and there are only 5 banks that control most lending in Canada compared to 8000 banks in the US.”

      Not even close. Not by a country mile. CMHC only guarantees high ratio mortgages. You could make the argument that CMHC guarantees most new mortgages, but that’s it. As far as 5 banks versus 8000, that’s a bit misleading too. There are many mortgage lenders in Canada, not just banks, many credit unions and private mortgage funds as well. Besides which, you’ll note the banks aren’t holding any new mortgage debts on their books over the past few years anyway. They’ve been spinning them off as MBS’s faster than they’ve been writing them. And that is exactly what occurred in the USA that led to widespread credit issues.

      “But this does not mean that because housing is expensive prices are going to crash.”

      Why not? That’s what’s happened in every other market, including ours in the past.

      “People hoping that the government will pop the bubble are completely deluding themselves.”

      I’ve yet to see anyone writing this. It appears to me at least that most commentators are saying that government efforts to reign in mortgages is more about preventing the market from collapsing under its own weight rather than bursting the bubble.

      “It is the best way the government and the central bank can engineer a smooth landing without too much shock to the economy. And they will try and most probably succeed. I would like to hear the reasons why this cannot happen.”

      I’d like you to show me one example where a government was able to “engineer a smooth landing without too much shock to the economy.” First you have to prove it’s possible before you assert that it’s going to happen unless someone can prove it won’t. Otherwise, you’ll have pesky little statements like “it’s never happened before” offered up as proof positive why it won’t happen this time.

  10. debunking says:

    @ don
    “Just out of curiosity debunking why has the canandian government let it crash in the past”

    When I look at this average price chart, I see no crash, prices have been going up since 1977. Goverment has done a fine job inflating RE. Look for yourself.
    http://www.yattermatters.com/2010/12/vancouver-average-prices-shell-game/

    • John in Ottawa says:

      Just a couple of points:

      1) This argument that the US has 8,000 banks is a red herring. The 8,000 regional and local banks were not involved in the US housing market. They were involved in the commercial real estate market. Only about 10 of the largest banks were involved in residential. Finally, FNM and FRM now account for 95% of the residential real estate market, only ten banks, lots of programs and stimulus, QE, etc and house prices still fall.

      2) So I looked at your chart. Notice 1981. Prices were about $195,000 and two years later were about $160,000. That’s not a crash? Again, look at 1995. Prices are just north of $400,000 and then sink and don’t recover until 2003.

    • HHV says:

      “Goverment has done a fine job inflating RE.”

      Did government inflate real estate? I thought it was the buyers willing and able to pay more than the last person that was responsible for inflating real estate?

      Me thinks you give government far too much credit where it’s not due.

      You’ll also note that it was government efforts to fight inflation that led to the 1982 crash in Vancouver real estate as so evident by Larry’s graph you linked to. That was an especially ugly time for Vancouver’s, and Victoria’s, real estate markets. You conveniently don’t include Toronto’s bubble and burst in the early 1990s either. Prolonged periods of flat real estate prices are almost as bad on the wider economy as sharp corrections. Builders stop building, people stop spending and jobs disappear, adding negative pressure to prices.

      The flat period of pricing between 1995 and 2001-02 in BC was made possible in part by a 5% decline in interest rates over the same period of time. Are interest rates going to drop to help keep our markets stable moving forward?

    • LS says:

      @debunking
      You made a convincing argument up until you linked to that graph. Did you forget inflation? Here’s the real story:
      inflation adjusted vancouver real estate

      There have been some very steep crashes in the past.

  11. don says:

    debunking Here is my personal history regarding falling real estate. I bought a farm in 1993 for 232000. In 1987 it sold for 280000. and get ready in 1989 it had sold for 575000. If people are patient they have far more power than government.

  12. debunking says:

    @ john
    1) I dont agree that the 8k US banks were not involved in RE. How many banks have failed since 2006 in US because of this, I think around 300 or more? How many have in Canada? Zero!
    Why was our goveremnt sucssesful to stop and re-inflate RE in 2008 when it started to crash?
    2) you are cherry picking sections of the chart. Prices falling from 195k to 160k in two years does not seem like a crash to me. Remember also that we had interest rates over 12% during that period.
    Your example of stagnation from 1995 to 2003 is proof of what I said above, prices can stagnate while inflation slowly creeps up.
    We would need a crash of more than 50% today for prices to align with fundementals. There is no precedent for it in our RE history, I am not saying it might not happen, but it will not be sudden. It will be prolonged stagnation for a very long time, while inflation creeps up slowly and interest rates lag behind inflation for year.
    The goverment and the Central bank will not allow sudden shocks to the economy, do not underestimate them.
    Just my opinion, I have no crystal ball.

    • John in Ottawa says:

      I’m aware of the “bank failure fridays,” but the regular bank failures we hear about every week are related to commercial real estate. The few banks involved in residential real estate that failed, Washington Mutual for instance, failed in the early days of the crash.

      Cherry picking? That means there was no stock market crash in 1929 or 2001. Just pick a long time frame and let inflation do the rest. Frankly, if I had purchased a house for $195,000 and found it worth $165,000 two years later I would have been upset.

      I’m sorry, but your arguments aren’t convincing. If the US government couldn’t save their housing market, don’t count on Canada’s government to do any better.

    • HHV says:

      The government has never been able to prevent markets from crashing. If they have, show me when, where and how please.

      As for the 1982 crash. It crashed. All across Canada, prices dropped anywhere from 15% to 30%. That’s significant. If that were to happen today, you’d be looking at an average BC home price going from $500K to as low as $350K. I don’t know too many people who wouldn’t be calling that a crash.

      Interest rates went from 18% to 21%, not 12% as you said. That’s only representative of a 3% rise. In Canada, we’d only need to see interest rates return to the historical norm of 6%-7% to see the same effect on our home prices.

    • Chad in Burnaby says:

      debunking: “The goverment and the Central bank will not allow sudden shocks to the economy….”

      Why would they? It’s worth reading Ben’s primers on this site. The Government or the central bank does not need to shock the RE market. People can do that all by themselves!

      “..do not underestimate them.”

      Just because they wake-up one day as members of the Government does not mean they get superpowers. As others have said, you’re giving them too much credit.

  13. debunking says:

    @Chad
    you dont get it. Our goverment and Central bank have already succeeded in stabilizing our RE. That was back in 2008 when we started the slide. Welcome to stagnation.

    • LS says:

      Who knows, you could be right. But it would be the first time in history they actually did manage to avert a crash. Doesn’t mean it’s impossible, but it sure doesn’t have any precedent.

    • ATP says:

      Debunking:

      If the government’s goal is to keep the real estate party going, why did it not continue allowing 40 year amortization, or even allow 50, 60 year amortization? Why tighten mortgage rules at all? What are they worried about?

      It doesn’t take a crash for a house-debtor to get in trouble. Ever heard of death by a thousand cuts?

    • HHV says:

      “Why was our goveremnt[sic] sucssesful[sic] to stop and re-inflate RE in 2008 when it started to crash?”

      Did they? And did they do this on purpose? The drastic cuts to interest rates was a response to tightening business credit conditions. I’ve read no credible analysis that suggests the Bank of Canada acted to shore up a sinking real estate market.

      Furthermore, the one concrete action taken by the government in regards to real estate in 2008 – the elimination of 0% down 40 year amortization mortgages – suggests the government was acting against the market at that time.

  14. debunking says:

    @HHV
    Other than pointing out my spelling mistakes, your post has nothing of substance.
    Never look at what the politicians say, look at what they do.
    The facts are that they spectacularly arrested the fall of 2008 shows the powers of our government and CB to fine tune our economy.
    Unless you are predicting Armageddon, I see no reason why it cannot continue.
    I haven’t seen any argument here as to what insurmountable difficulties might occur to prevent our government from keeping RE stable.
    I am tired of the desperate thoughtless bear argument that RE will collapse despite whatever the government does, and all of the sudden all bears are now looking to the government to pop the bubble with new rules. This defies logic.

    • John in Ottawa says:

      First, let me say that I’m an RE agnostic. I am not convinced that there is an RE bubble in Canada generally. Perhaps in Vancouver, but Vancouver seems to be a special case. I just can’t get a read on it.

      As for comparing the situation in Canada and the US, it really is true that Canada is different. Not so much that what happened in the US can’t happen in Canada, just that what happened in the US happened for very different reasons than would be the case if Canada’s RE suffers a correction.

      You say that the Canadian government or central bank did something to stop a RE correction in 2008. As has already been mentioned elsewhere, the only obvious action CMHC took in 2008 would have slowed down the RE market.

      Please, tell me if you know, what specific actions did the Canadian government take in 2008 to reverse the correction that started?

  15. mac says:

    Good lord, not the death by a thousand cuts analogy again. And “if the people see that buying a house isn’t a good purchase anymore,” God, not that again. Sigh. Debunking’s main point, I think, is stagnation. Stagnation in house prices is what the BoC and the federal government is aiming for. Not too far up (hence tighter mortgage lending rules) and not too far down (slow to pull the interest-rate trigger). That’s all they can do.

    If there were the underlying problems to the extent they had them in the US, there would be nothing they could do. But so far, they haven’t had to face a) a near collapse of Canadian financial institutions b)corrupt banking practices c)massive overbuilding in huge areas of the country d) global blowback from the securitization and collapse of Canadian housing debt etc., etc., etc. They’ve steered us through the global financial meltdown and been “blessed” (or cursed) with an obsessive interest in our assets by foreign companies and individuals. Meanwhile BC businesses have found markets other than the US for their goods, even the moribund forest industry.

    Our masters have been lucky and smart. Now they’re trying to figure out how to wind down Canadian debt without causing massive bankruptcies and foreclosures. Could they get lucky again? It’s freakin’ possible.

    BC mines re-opened and operating. The forest industry actually making a comeback. Vancouver real estate still rising and possibly on its way in to catching up to “the worlds’ most expensive real estate”, which everyone knows is in coastal China. Just went for a walk, tons of SOLD sign on SFH on westside Vancouver. Someone is buying those 1. 9M yucky homes from grandma and grandpa. Where does all that money go?

    However, condos so far are flat. Maybe a few tweaks to the mortgage rules and increasing taxes will do something to diminish YVR condo prices. Or, like every other government intervention, it will have an unforeseen effect, and end up helping to price locals out of the market, while foreigners come in and snap them up (as long as they’re not next to hospice’s).

    Believe me, I don’t want any of this to happen. It’s just that after years of pretending I knew which economic trigger would cause what collapse, I can see that people like Rosenberg, Flaherty & Carney have access to much better data than I or other bloggers do. So when a guy like Rosie says we’ve avoided a bubble. I tend to take notice.

  16. ATP says:

    Stagnation of house prices? You mean like the Goldilocks not too hot not too cold just right condition that Alan Greenspan and Ben Bernanke thought they were able to achieve by way of their infinite wisdom and ability? (I can see mac’s eyes rolling. “Not this US comparison again blah blah blah …”)
    By the way, the US and global financial crisis was CAUSED by a drop in house prices, not the other way round!
    So stagnation is what the government wants, right? What, then, should the government consider to be the RIGHT price? 200K? 500K? 1M? 3x income? 5x? The current price? What? Also, when would be the right moment to intervene? When sales volume drops 5%? 10%? As soon as prices started dropping? 3 months afterward? If one were Mark Carney or Jim Flaherty, how would one decide?
    For prices to stagnate, you have to have a perfect match between supply and demand over the entire period of stagnation, as well as neither a net expansion nor contraction of money and credit during that time. With so many factors that can affect the respective size of the buyer and seller pools (demographics, local and global economy, immigration, etc.), and so much tinkering of money and credit by governments, how likely is it for prices to be stagnant, especially when valuations are already at such a high level?

  17. debunking says:

    @John,
    “Please, tell me if you know what specific actions did the Canadian government take in 2008 to reverse the correction that started?”

    How about buying 75billion of mortgages from the banks though CHMC?
    How about ordering CHMC to insure almost all mortgages without discrimination?
    How about extreme low interest rates?

    @ATP
    Government does not care about the right price; it cares only about keeping status quo.
    They have all the data and know exactly the situation regarding the mortgages. I am sure they will act accordingly by tightening lending rules or making them more relax + incentives depending on the situation.

    CB and government have huge leverage in our RE via CHMC and the big 5. This is not the case in the US, so pls stop referring to the US all the time.
    Default rates are at historical average levels in Canada. Prepare to see this situation last for years, with very little change on the actual prices and inflation rate at 3 to 4% while interest rates lag by 1 to 2% points.
    Prices will come down, but it might take 20 years and you won’t feel the difference, a perfect soft landing indeed.

  18. debunking says:

    @ mac
    Your anecdotes are interesting.
    I work in the pulp and paper engineering business and as the recession hit, about 20% of the people were laid off as there was no agreement between the union and the boss on how to participate on the work share program subsidised by the government.
    Lately the government decided to invest about 1 billion on the pulp and paper mills ( energy savings, upgrades, cogeneration etc) and I can tell you that not only all the laid off people are re-hired now in our company, but we are aggressively hiring new engineers. There are lots of openings and most contractors I know are very busy.
    Never underestimate the power of government. I know that in the long run maybe we will all pay for this through higher inflation but who can say how long the long run will be before the reality kicks in?

  19. don says:

    Sorry ,we have witnessed the power of government to stretch natural economic reality for around thirty years. I think the whole point is that we might be rapidly running out of room to move.

  20. ATP says:

    Debunking: “Government does not care about the right price; it cares only about keeping status quo.”

    What’s so special and great about the status quo that the government will want so much to keep? If government does not care about the ‘right’ price, what’s the central bank doing ‘targeting’ inflation via monetary policy? Why not let prices go wherever they want?

    Debunking: “CB and government have huge leverage in our RE via CHMC and the big 5. This is not the case in the US, so pls stop referring to the US all the time.”

    Have you ever heard of Fannie Mae and Freddie Mac? How about the FHA? This is not the case in the US? Wha??

    By the way, looks like the Australian RE market is starting to slow, and they have been benefitting way more from the Chinese boom than we have. This is going to be an interesting year.

  21. mac says:

    ATP: “By the way, looks like the Australian RE market is starting to slow, and they have been benefitting way more from the Chinese boom than we have.”

    What are you reading? Where are you seeing this? Both these points interest me if you have any links, much appreciated, especially your second point. Maybe by “we” you mean Canada, as a whole. Thanks.

  22. Ray says:

    How many times is debunking going to say CMHC incorrectly? He looks idiotic saying that this will go on forever. Good argument!

  23. ATP says:

    mac:

    Yes, by we I mean Canada.
    Regarding Australian RE, economist Steve Keen did an interview with Max Keiser. Here’s the link: http://www.debtdeflation.com/blogs/. Scroll down until you see the embedded video with Keiser’s face on it. Keen’s comment on Australian RE is towards the end of the clip, but the whole video is worth a watch.

  24. Grrr says:

    Flat housing prices are not possible. There are too many houses that are held for varying amounts of time by investors looking for appreciation. If there is no appreciation, the investors will go elsewhere. That loss of demand will cause prices to drop.

  25. mac says:

    Grrrrr…

    You should visit today’s VancouverCondoInfo blog. A poster of Asian descent comments on the meaning of real estate for Chinese parents. It’s not rational. It’s not typically Canadian. But it’s worth taking note of.

    • Grrr says:

      mac,

      Not all investors are Asian nor have that mentality. You may find it surprising, but some investors are looking for monetary returns on their investments. As long as investors looking for return are part of a market, said market cannot be flat.

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