Things Are Coming Unglued for Canadian Investors

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Investor Sentiment Hits Worst Level since March 2009.

The oil price plunge is mauling Canada’s oil producers, particularly those active in the high-cost tar-sands. It’s tripping up the oil-patch economy, and contagion is spreading beyond the oil patch. The Canadian dollar has lost one third of its value against the US dollar since 2012. One of the most magnificent housing bubbles the world has ever seen appears to be peaking and is already deflating in some cities. And the Toronto stock index is down 25% since August 2014.

No wonder Canadian investors are frazzled.

And the semi-annual Manulife’s Investor Sentiment Index put a number on it: Canadians’ investment sentiment fell another 3 points from its beaten-down levels six months ago to 16, the lowest level since March 2009.

The index is a composite of investor perception about six asset classes – stocks, fixed income, cash, balanced funds, investment property, and investors’ own home. It has ranged from an all-time high of 34 in 2006, during the halcyon days just before the Financial Crisis when everything was still possible, to its all-time low of 5 at the end of 2008, at the depth of the Financial Crisis. By March 2009, it was at 11. Since then, it has hovered in the mid to high 20s.

The survey, conducted in December, doesn’t yet include the impact of the sharp decline in oil prices to new cycle lows and the decline in stock prices since the holidays. At this point, the index hasn’t yet reached the level of desperation during the depths of the Financial Crisis, but it’s getting closer. The report:

Along with eroding investor sentiment is the feeling among Canadians that they are in a worse financial position than they were two years ago (26%).

Canadians are increasingly viewing housing as a less attractive investment having dropped three points in the last year. The two largest drops were in British Columbia (13 point decrease since November 2014) and Ontario (decreased six points in the same time period).

Those two provinces are the epicenters of the Canadian housing bubble. According to the Teranet National Bank House Price Index, since the peak of the prior insane housing bubble in 2008, home prices in Vancouver have soared another 40% and in Toronto another 54%.

Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked. It’s just a questions of when. In some cities, home prices are already declining. And investors, according to the report, are no longer blind to it.

Manulife Asset Management’s Senior Economist Frances Donald explained that “the growing perception among many Canadians is that housing has become overvalued.”

This impacts the sentiment about investing in housing as investment property, and Canadians are less likely to pump money into the sector. But it also impacts homeowners’ intentions to invest in their own homes. That index fell 5% in six months. As the report put it:

Homeowners may be feeling that the additional benefits of investing further in their own home will not be reflected in the future value of their home.

This is probably more true in Toronto and Vancouver and surrounding areas, where house prices are considered to be more overvalued than in other regions.

And it hit other asset classes as well, as investors are grappling with “a long list of uncertainties, including tremendous volatility in both oil prices and the value of the Canadian dollar.” The report’s chart shows how investor sentiment swooned as oil prices collapsed and as the Canadian dollar fell.

Over the past six months, Canadian investors lost confidence in mutual funds (down 8 points), ETFs (down 7 points), and balanced mutual funds (down 7 points), while fixed income remained at the same low level (3 on the index).

And the Bank of Canada should take note: 77% of the investors said that interest rates, whatever they may be in the future, will not have any impact on their investment strategy. So if the BOC thinks it can re-heat investor passion for housing and stocks by slashing rates further, after the two rate cuts last year, it should think again.

Investor sentiment surveys are intended to be predictors. Strong sentiment about an asset class indicates investors intend to throw their money at it in the future, and this activity itself would be expected to drive up prices. On the other hand, when investors get frazzled about an asset class, and particularly so many asset classes simultaneously, it indicates they’re likely to try to liquidate some of their investments and take money off the table, putting further pressure on those asset classes.

This would be precisely what could prick Canada’s magnificent housing bubble. And then all bets are off.

Owners of small businesses in Canada have been feeling the blues for months. In January, their optimism dropped to the lowest level since March 2009, as Alberta fell off the chart. Read… Crushed Currency, Oil, Domestic Demand Broadside Small Businesses in Canada, Worst since March 2009

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  26 comments for “Things Are Coming Unglued for Canadian Investors

  1. Yoshua
    February 16, 2016 at 5:21 pm

    Canada is collapsing… Mexico… Venezuela… Brazil… Argentina… Nigeria… Russia… China is collapsing… European banks are collapsing… global trade is collapsing… stock markets are collapsing… Middle East and North Africa are collapsing… everything is collapsing.

    • OutLookingIn
      February 16, 2016 at 5:40 pm


      To fall or cave in; to crumble suddenly.

      For the first time in the history of the world. A global economic collapse.
      Everyone on the face of the planet will be affected by some degree.
      Some more severely than others. It will be epic. History being made.

  2. Vespa P200E
    February 16, 2016 at 5:48 pm

    Our Canadian brethren are facing currency and commodity including gold and especially oil crisis. Mexico too is facing currency and commodity pressures.

    And we have 1 man standing with USD strong as ever with RE markets at all time high and S&P barely budged at down 13%.

    As Yoshua pointed out Japan, China, EU, EM and most markets outside US in dollar term are in bear market territory. Well – something just have to give. Air of WW III is in the air with Russia/Iran/Shiite on 1 side and US/NATO/Saudi/Sunni on the other in Syria…

    Enjoy the likes of today’s dead cat bounce and load up on puts/shorts and double short ETFs (for short duration trades) as I cannot fathom US market becoming unglued like other markets, soon.

  3. Michael
    February 16, 2016 at 6:31 pm

    Canada, like many nations is now made up of two types of people; those who are awaking to reality, and those who are still in a fog of delusion.

    And what a fog it is! Just try and tell them house prices will drop! I dare ya!
    You’d be messing with their only hope for financial survival, which is why they cling to it so fiercely.

    I know people taking out loans against their home…to pay their mortgage. Yep, and if I know some, there’s a whole lot more.

    When this blows up, it’s gonna be severe.

  4. Nick
    February 16, 2016 at 6:58 pm

    Personally, as a (new) Canadian without any experience investing, I suspect that this slump is explainable by looking at two factors. One is obviously oil — the crash in prices has devastated one pillar of the economy. That leaves financial services; in my experience Canadians are much more reliant on a simple strategy of ‘buy bank stocks, eat dividends’ than Americans are — however, the constant articles about the housing bubble can’t really be encouraging here, nor the way that everyone is waiting for a financial crisis from China and Europe. With energy gone, and banking suspect, what is one to invest in?

    I think the dollar is kind of a sideshow here.

    • Mick
      February 16, 2016 at 7:25 pm

      Pretty much every stock market in the world is in a bear market, and the data(as fabricated as it is)says the world is entering a recession. I think this is much bigger than oil.

      • night-train
        February 17, 2016 at 4:02 am

        I agree. Oil is just the attention getter. I remember back when China became the consensus world miracle. I asked then, how we could trust their economic numbers. Too much of a skeptic I guess. I am loath to buy into something when I can’t figure out how it works.

  5. rich
    February 16, 2016 at 8:18 pm

    “Statistics Canada says the debt-to-income ratio of Canadian households stands at 163.3 per cent. That means for every dollar Canadians earn, they owe $1.63 in debt.”

    What could go wrong?

  6. Ptb
    February 16, 2016 at 9:11 pm

    If it’s a currency war, who is winning? USD is looking like the safe bet to be the strongest, but then who can afford anything priced in USD?
    Somethings bad this way comes.

  7. memento_mori
    February 16, 2016 at 9:14 pm

    Canada housing bubble has proven wrong everyone for the last 15 years.

    From the chart, it looks that this bubble is gonna burst soon in all probability.
    How does one short RE in Canada?
    You cant short the banks as they have passed all their mortgages to CHMC (our Freddie Mae equivalent), so the only thing left would be the CAD.
    But the CAD has been always trashed to 70cents. Interesting times.

  8. Jonas
    February 16, 2016 at 9:33 pm

    The world is being flooded with monetary easing, and soon i suspect more qe programs as well. I closed out some of my shorts last week and actually wouldn’t be surprised if we rally more from here.

    I mean seriously, we all know QE does work to produce effects; perhaps it just takes a bit longer now to take hold. Just like an opiate addict can still get high when the dose is large enough, the world wide easing right now will work eventually.

    Coupled with the recent excessive investor negativity I suspect we could have a rally in the US soon. The long term problems remain, but i will put some capital to work betting on US mid caps to appreciate in the next 3 months.

    If markets follow the path of maximum frustration, the rally will last just long enough to convince everyone it’s not just a d.c. bounce. Then it’s down again.

    • Human@B
      February 21, 2016 at 1:48 pm

      When een addict takes a to large a dose, you got a……..?
      And then the lights go out permanently, i wish you “Great Wisdom”.

  9. Nooneofconsequence
    February 16, 2016 at 9:36 pm

    From a Canadian living in YVR….read my lips…


  10. Jeb
    February 16, 2016 at 10:51 pm

    Canada isn’t actually “collapsing,” for crying out loud.

    What is going on is what has ALWAYS been going on in Canada.

    When commodoties are strong, we strengthen the dollar, to maximize the strength of our exports, like oil.

    When commodoties are weak, we weaken the dollor, to maximizw the strengthy of our other exports, like steel (made in Ontario) and Bombardier Jets (made in Quebec).

    It has ebbed and flowed like this for decades now.

    That’s not to say it won’t go KABOOM! tomorrow, but still… this is the Canadian way, for decades now!

  11. Ford
    February 16, 2016 at 11:18 pm

    “Canadians know that this is a bubble, that these prices are unsustainable”

    No they don’t. Perhaps savvy investors do, but the run of the mill Canadian is still in denial. I suggest you visit. All the Canadians I spoke to highlighted the wonders of their higher down-payments and other drivel about back-ground checks that prevented their housing from resembing the US NINJA bubble.

    You also blithely ignore the MASSIVE amounts of immigration going on there. They will take on ANY amount of debt to own a home. Housing speculation is still in its hysteria phase.

    As long as the banks are willing to lend Canadian housing will continue to rise. This is not rational or reasonable and it doesn’t balance.

    That’s what been happening for the last fifteen years!!!

  12. LG
    February 17, 2016 at 12:14 am

    Yep Canadians are smart and very rich!

    Look at them million dollar shacks they can buy with cash!

    What you say, those are Chinese buyers?
    Oh oh?

  13. james
    February 17, 2016 at 12:17 am

    Remove Canada, and insert Australia in the piece above. Here’s a couple who were RE Investors of the year…too bad they now owe $3mil in full recourse loans…quite different than the Jinglemail of North America:–kate-and-matt-moloney-174115.aspx


  14. MC
    February 17, 2016 at 9:05 am

    Canada has another problem as well.
    Back in late September, it was announced the Government of Quebec would effectively bail out former “cannot do wrong” aircraft manufacturer Bombardier.
    The bailout first took the form of Quebec taxpayers becoming unwitting partners in the troubled CS-series narrowbody jetliner: they now “own” 49.5% of the troubled program.
    The CS-series was an attempt by Bombardier to enter the highly profitable narrowbody market. Problem is Bombardier arrived late to the party, the CS-series was plagued by delays and cost overruns and, much more critical, it entered an extremely competive market owned lock stock and barrel by Airbus, Boeing and Embraer.
    In what can only be described as a stroke of pure financial genius, Bombardier transferred a good chunk of the R&D carried out for the CS-series to COMAC, a Chinese SOE, in return for a lump cash payment.
    This meant that the potentially lucrative Chinese market was lost: COMAC already has 185 orders for the C919, all from Chinese carriers. That’s more can Bombardier can show. To add insult to injury (in)famous Irish budget carrier Ryanair has expressed interest in the C919 despite the aircraft existing only on paper. This is probably nothing more than a clever rouse to get a better deal from Boeing (Ryanair’s traditional partner) but the fact Bombardier was not even considered speaks volume.

    As Quebec taxpayers are still trying to figure out if the bailout will cost them as much as they were originally told or more, Air Canada (based in Montreal) has announced orders for 40 CS300’s. Whether this is part of the bailout package or the new joint venture simply cut ACA a great deal to keep the factory doors open, we’ll never know… but it’s telling at the same time ACA ordered 18 Boeing 737-MAX. The 737’s will be delivered next year while the CS300’s will be delivered in 2019 despite Boeing being literally flooded by orders from airlines (3072 firm orders as of December 31 2015).

  15. Kam
    February 17, 2016 at 9:47 am

    Canada’s miracle housing market was built on 2 platforms.

    Cheap debt- the lower the interest rate, the greater the price you can pay for any given piece of dirt. Central banks didn’t get more people into homes, they increased real estate prices.

    And China’s seemingly unlimited appetite for raw resources.

    Lots of Chinese money parked in Vancouver. Better hope the Politburo doesn’t call the money home.

  16. Chris
    February 17, 2016 at 11:52 am

    I think the problem with this analysis is that it keeps referring to “Canadians” as a homogenous group, when economically nothing could be further from the truth. It is perfectly rational for anyone in the resource rich parts of the country (which is most of it) to be feeling despondent, because what we are really seeing globally is the deflation of the resource bubble based upon the fairytale of endless linear Chinese growth. Of course investor and housing sentiment is negative there – perhaps not negative enough yet.

    But Canada’s “housing bubble” is really a Vancouver and Toronto thing. The question there is what, if anything pops it? The greatest risk is inflation leading to higher interest rates that changes the monthly payment of the homeowner, but that now looks less likely and the BoC is openly studying negative interest rate policy. The second is a massive withdrawal of foreign money as happened in the early 90s, but the foreign money driving the bubble in those cities is primarily coming from China, India, Korea and Iran, none of which is able to “recall” the money in a good old fashioned central bank way.

    I highly suspect that what is really driving these markets is a combination of low rates (for locals) and global capital seeking a safe place. Do not forget that most overseas buyers have USD assets, and so the weaker Loonie has actually made prime Vancouver/Toronto real estate significantly cheaper than it was a couple of years ago. As a result these towns increasingly resemble resort towns like Aspen or Nantucket, where local real estate values have no correlation to local economics or affordability.

    My conclusion s that remarkably these two markets may have quite a lot more yet to run and that the global factors other commentators refer to may well drive not hinder them.

    • February 17, 2016 at 12:02 pm

      This article is about Canadian investors, as the title points out. So “investors,” “Canadian investors,” and “Canadians” are used interchangeably (perhaps lazily) to describe Canadian investors.

    • PaulM
      February 17, 2016 at 1:54 pm

      Finally, a little commonsense. There’s no “RE bubble” in most of the country. But, to take Wolf’s reply, I exited the market to take my 2%. The rollercoaster in the US and the playground slide here are entirely too nauseating for my weak stomach.

  17. Chicken
    February 18, 2016 at 2:00 pm

    I dont know if the Canadian realestate market is primarily a result of immigration policies, perhaps it is? Other data I’m having difficulty comprehending are US employment results.

    Are these a “transitory” result of “you get a green card if you come to our country and create opportunity”?

  18. Ben44
    February 22, 2016 at 2:17 am

Comments are closed.