“All of that negative news has kind of put a downer on consumer sentiment,” is how Jharonne Martis, director of consumer research at Thomson Reuters, explained the crummy consumer confidence reading on Friday.
The Thomson Reuters/Ipsos Canada Primary Consumer Sentiment Index had dropped to 51.6, the lowest so far this year and well below the 56.4 of last August before the oil-price crash soured the mood. By comparison, since 2010, the index has mostly been in the mid-50 range.
The “negative news” has extended beyond the price of oil. She pointed at some well-known retailer chains that have shut their stores in Canada recently, including Target, Future Shop, and photography retailer Black’s.
Already on March 30, Bank of Canada governor Stephen Poloz had warned that economic growth would be “atrocious” in the first quarter “because the oil shock is a big deal for us.” And he was right, with GDP dropping 0.6% annualized, the first quarterly decline since 2011.
It didn’t help that the Bank of Canada, in its Financial System Review released on Friday, pointed out that household indebtedness and the housing bubble were the top two vulnerabilities that threatened Canada’s financial stability. The top vulnerability:
“Elevated” – actually dizzying – “level of household indebtedness”:
The vulnerability associated with household indebtedness remains important and is edging higher, owing to an increase in the level of household debt and the ongoing negative impact on incomes from the sharp decline in oil prices. In addition, the quality of household debt may be decreasing at the margin….
Household leverage has been pushing relentlessly higher. In the first quarter, according to Statistics Canada, the household-debt-to-disposable-income ratio edged down a smidgen for the first time in four quarters, from its all-time high, to 163.3%. Debt increased once again, but this time slightly less than income.
The second most important vulnerability to threaten financial stability, according to the Bank of Canada?
“Imbalances in the housing market”:
Regional divergences in resale activity and house price growth have become more evident, with an apparent trifurcation of the national market. Although house price growth on a national basis has slowed modestly, it continues to outpace income growth, and overvaluation in the Canadian housing market remains a concern.
The Bank of Canada considered the housing market up to 30% overvalued. That may be conservative. Deutsche Bank estimated that it was 63% overvalued. The IMF warned about high household debt levels and the “overheated housing market.” And the Economist determined the housing market to be overvalued by 35% compared to incomes, and 89% compared to rents.
On Friday, the Teranet–National Bank National Composite House Price Index outlined this “trifurcation” in the housing market. The overall index rose 0.9% in May from April, the fifth consecutive monthly increase. But it was below the average increase for May of 1.1% due to a record 3.3% plunge in Calgary’s prices.
In Calgary, the epicenter of the Canadian oil patch, things are getting ugly. The index is down 5% from its peak 7 months ago. For thank-goodness, Calgary’s weight only accounts for 8.3% of the index. Marc Pinsonneault, senior economist at National Bank Financial, explained:
The record monthly drop in Calgary house prices was concentrated in dwellings other than condos. This is consistent with anecdotic evidence that so far, Calgary’s market for high-end expensive homes has borne the brunt of the collapse in oil prices.
Note how condos dropped at a nearly steady rate over the last seven months, while “other” – weighed down by “high-end expensive homes” – plunged in May:
The indices for the other 10 metropolitan markets rose on the month, “a breadth last seen in August 2014.” Year over year, the national index was up 4.6%. The index is now 28% above its peak during the housing bubble before the Financial Crisis:
The biggest drivers were Toronto and Vancouver. In Toronto, whose weight accounts for 34.6% of the index, prices jumped by 7.6% year over year are now 44% higher than at the peak of the prior housing bubble:
In Vancouver, whose weight accounts for 19.5% of the index, prices jumped by 6.2% and are now 27% higher than at the peak of the prior housing bubble:
The overall index along with the indices for Toronto, Vancouver, Quebec City, and Hamilton are at all-time highs. There, the housing bubble reigns in its magnificent splendor, still, at least on the surface. But in the remaining seven metros, prices have dropped below their peaks, with Calgary down 5% in 7 months and Ottawa-Gatineau down 4.8% in 9 months.
High household debt and a magnificent house-price bubble coagulate into a toxic mix for Canada’s financial system. An increase in unemployment would put these highly indebted households under severe pressure, and if this happens as home prices succumb to gravity once again, it will give the good folks at the Bank of Canada a lot of gray hairs in trying to prop up the banks.
But even in Toronto, where the bubble is at its most splendid magnificence, the hiss of hot air can already be heard: unsold new condos spiked to an all-time record. Read…. Toronto’s Epic Condo Bubble Suddenly Turns into Condo Glut