A litany of problems, from too much debt to deflating housing bubbles in Vancouver and Toronto.
By Steve Saretsky, Vancouver, Canada, Vancity Condo Guide:
With the Bank of Canada’s overnight interest rate stalled out at 1.75%, lower than the rate of inflation, and leaving real rates stuck in negative territory, monetary policy continues to deliver stimulus to an incredibly long and aging economic expansion, one which has witnessed record debt accumulation. That is, at least, according to Bank of Canada Governor Stephen Poloz who delivered a speech in Montreal this past week.
Poloz ironically re-iterated the consequences of a prolonged negative interest rate environment:
“We have seen the natural results of leaving interest rates very low for a long time. For one thing, this has been hard for people, such as retirees, who rely on interest from their savings for their income.
“Further, people have taken on a lot of debt, mostly in the form of mortgages and home equity lines of credit. By 2017, the ratio of household debt to disposable income had hit a record – with the average household owing more than $1.70 for every dollar of disposable income.
“If we remove households that do not have mortgages, the ratio becomes much higher – close to $3 for every dollar of disposable income. And house prices were rising extremely quickly in some of Canada’s biggest cities.”
Indeed, the Canadian debt story has perhaps grown tiresome. Yet a recent report from Bloomberg Intelligence further reminds us the debt problem won’t be going away anytime soon despite continued warnings with little repercussions to date. Per the report, the share of uninsured mortgages and home equity lines of credit (HELOC) at most big Canadian banks has crept up to 65% of their mortgage portfolio. CIBC takes the cake, with uninsured loans reaching 66% of the mortgage portfolio and total mortgage lending accounting for 60% of all loans. Nearly half of its lending is dedicated to Ontario and British Columbia.
However, recent shifts in the housing market have awoken debt skeptics and policy makers alike. Most notably, Mr. Poloz, who admittedly was caught off guard in his most recent speech:
“Housing activity has been a little weaker than we expected recently. Mostly it is housing resales that have been soft, suggesting there may have been more froth in certain housing markets than previously thought.”
National home sales were down just 4% year-over-year in January, the slowest January since 2015. However, as Mr. Poloz noted, Canada’s once frothiest markets have elicited significant weakness. The Vancouver housing market witnessed sales sink to an 18-year low in 2018, while home sales in the Toronto area slipped to a 10-year low.
Rest assured, Poloz eased market jitters confirming:
“Housing markets that were not experiencing bidding wars appear to be adjusting in line with our expectations. However, more data will help us better understand the full situation in Canada’s housing market.”
Indeed, more data is just what the Governor ordered. Mortgage-delinquency rates, a lagging indicator, remain relatively benign in Canada, although a recent uptick in December along with an increase in personal bankruptcies over the prior two months suggests the bottom is in, and we are moving higher from here. By Steve Saretsky, Vancity Condo Guide
Average home price fell for first time since 2008, largest decline in the data going back to 2001. Read… Canada’s Majestic Housing Bubble Deflates, Media Hype U-Turns
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Excellent Article!
It is all according to plan
Decimate Savers and those in retirement
FORCE them into higher risk stocks
and then steal their money in the market.
THE Entire Plan is to force everyone into the market
regardless of Risk, so that algorithims and insiders can steal the money.
.
. They have stolen ten years running of my retirement income
They have raised housing and other prices so the youth cannot afford
without high risk loans and limited downpayment
and caused tremendous income inequality
WHILE Funding corporations to use low cost money
to build AI / Robotics causing decrease in jobs available
If the money is more expensive many would not be able
to automate
So they are destroying the youth opportunity for jobs.
Doesn’t it just seem the central banks are going to end up with major legitimacy issues?
BTW, have you written your congressman lately to suggest we need a more diverse Federal Reserve? In particular, we need more women, people of color and people with expertise outside of banking at the upper levels.
That’s your solution to Highway Robbery by the Oligarchs?
Equal Opportunity Banksters?
Or perhaps your comment was tongue-in-cheek?
If so, please pardon my rudeness.
Hi NJGeezer…from:
https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf
“Promoting Inclusive Leadership at the Federal Reserve System
The Federal Reserve Board of Governors, and the leadership across the System, should aim to increase diversity and representativeness in terms of race, gender, and perspective (given that few leaders come from outside of Wall Street). Increasing diversity is essential to the System’s future. While representation does not always equal expertise, as society grows more diverse, leaders who come from groups that have experienced marginalization and discrimination can bring valuable knowledge and insight into the system that can lead to better decisions and economic outcomes. Given the need for racial and gender diversity within the Federal Reserve, the Council recommends that future search committees focus specifically on recruiting women and people of color into its leadership positions.”
So they are looking for scapegoats now?
Correction: and then steal “ALL” their money in the market or U.S stock market ponzi.
Wolf: This may be a little off topic, but have any of you indicators shown that the Fed has altered it QT plan?
Not yet.
I post on this monthly after we get the balance sheet from last day of the month, when most security roll-offs take place. My expectation is that this will continue on autopilot until the Fed makes an announcement, and then a month or more later, the Fed will take it off auto pilot, or the auto pilot will be tweaked. This won’t happen by surprise.
“CIBC takes the cake, with uninsured loans reaching 66% of the mortgage portfolio and total mortgage lending accounting for 60% of all loans.”
Where is this data from? Is there data on other banks, online banks, or how the lending portfolio is spread geographically?
Here is the chart from Bloomberg Intelligence via Steve’s (the author) News Letter. It is from a subscription-only Bloomberg Intelligence report on this topic, and this report cannot be linked. But Steve took this screenshot:
Thanks. All are within the rounding error, and scary. There might be some hope: mortgages with high downpayment don’t need government insurance, but I doubt this is the case.
Toronto-Dominion Bank has the largest exposure to Helocs at about 39 per cent, followed by Royal Bank of Canada at 18 per cent and the other large banks averaging 11 per cent.
https://nationalpost.com/personal-finance/debt/canadians-keep-using-their-homes-as-atms-even-as-market-swoons/wcm/819059c2-27af-4d4b-b979-c0533c662e31
Consequence 1: No urgency to invest or improve productivity. The money value of time has been brought to zero. None of the other consequences matter.
The recent countrywide (a few exceptions), multi month downturn in housing prices along with decreased sales, has the Bank of Canada and the government alarmed. What to do?
Firstly, the real estate sector requires an infusion of liquidity, that does not “appear” to be QE. So the Bank of Canada has gained government permission to purchase “assets” from government controlled or guaranteed enterprises eg. CMHC mortgages, with money printed by government permission!
In a nut shell – BoC prints money with government permission, buys mortgages that are guaranteed by government, from a government controlled entity! And as if by magic, CMHC gets an injection of liquidity, so they may issue more mortgages.
By the way, the government is seriously considering extending the amortization period of mortgages. So as to entice younger mortgagees into the market. What could go wrong?
Here they are suggesting the securitisation (MBS) of the uninsured mortgage market. They note
“Following changes to housing finance policies that target insured mortgages, uninsured mortgage credit has been growing. ”
PDF at
https://www.bankofcanada.ca/2018/07/staff-analytical-note-2018-24/
That is half a year old, so not sure if they got round to it yet – I don’t follow all of this that closely. DSIB numbers are the main share in those figures, the NDSIB are probably shorter term credit lines. There is a chart in there of the increase in uninsured mortgages ( sure to be a more recent one somewhere too) in case Bloomberg doesn’t accept the above chart posted by Wolf.
All the unusual money actions of the central banks like quantitative easing and associated interest rate suppression were supposed to be a short term thing to save us from catastrophic economic disaster but it ever seems to go away – even the depression was well over in 10 years.
Housing itself has been turned into currency, ie. Gresham and Lysander. It took a guy living in his van to figure this out. That is why the BoC is alarmed.
65 million empty apartments in China. That isnt overbuilding. That is currency hoarding.
Rosebud: China has a peculiar trait when it comes to buying housing.
When buying new housing, nearly all high rises, the units are bought completely unfinished! Just concrete walls, floors, and ceilings. Also with no property taxes to pay, the carrying cost of owning an empty unit is relatively low compared to here.
The reason the units are left unfinished is because Chinese buyers do not like to buy used housing! They prefer to buy a unit that hasn’t been lived in before. If the new buyer wants to live in the unit they will then finish the interior to their liking.
These peculiar traits are a couple of the reasons the Chinese think nothing of buying housing in the west and leaving them empty for years on end!
Sure maybe but the main reason is the Chinese need to launder their money out of the country and into the Canadian housing market with the help of corrupt Canadian institutions and corrupt local and provincial governments.
Lysanders gigantic iron coins were quenched in vinegar, so the iron was limited in its re-use. The Greek historians noted that some of it became furniture.
I dont know where China is going with their empty apartments, except i think they have been quenched in vinegar too.
More than a few Chinese in Canada have learned thd marijuana business. Perhaps the apartments will become grow ops. Stranger things have happened
Now is the best time to buy
-NAR
Low rates are making a killing, aren’t they?
Wolf,
Love the information; do you see a trade we can make based on this research? Is there a way to short Canadian housing?
People have tried to short Canadian banks, but only with mixed results. Those that got the timing right and didn’t hold out for a price collapse came out OK. These banks are very exposed. But interest rates are low and the housing downturn just started and has not yet turned into any kind of mortgage crisis. As they say, so far so good.
Other folks have shorted scandal-plagued specialized shadow-bank mortgage lenders, with good results, for short periods. This started bubbling up in 2015 and went into 2017 (Home Capital Group), which I covered extensively at the time.
Americans trying to understand, or short, Canadian banks need to read the following:
‘Around C $4.6 trillion of assets are managed by the financial institutions in Canada. 70% of these assets are managed by the banks. And 90% of the banking assets are controlled by the top six banks in Canada.’
Buffet likes to look for moats, barriers to access. The Canadian banks form a gov mandated cartel: a moat.
‘Cartel’ was the word actually used by the CEO of Scotia Bank when an upstart was forced to sell to Scotia by the regulator.
‘You are lucky you are a monopoly’ said the seller.
‘No, we are a cartel’
WR (and maybe DQ) and I differ on this: but I think the US like Italy is grossly over banked. The US is ten times the size of Canada and by Canadian standards should have sixty banks. But it has almost 5000. No doubt these are not all biggies but still…
Canadians as we all know are conservative. They will pass up a bit of competition in banks for near complete solidity.
No one lost a dime in a Canadian bank during the Depression when 10, 000 US banks went under, with lots of deposits.
But are the Canadian banks over exposed to RE?
Sure. The world is.
But every time a Canadian uses ‘debit’ one of the Big Six has a nibble. A cartel is very profitable and like a moat can withstand quite a siege.
PS:it’s no big deal the US has lots of banks, the US is not in trouble, but surely the Italian banking crisis would be easier to manage if instead of 500 or so it had far fewer, via forced consolidation.
If Canadian banks are so Conservative and solid then why did the Bank of Canada loan the big 6 banks over $400 billion in 2008????
Put into perspective the US only loaned $700 billion! Since the US is 10 times the size of Canada, Canadian banks received more than 5 times as much help!
Worst they all pretended the bailout never happened!
‘The contrast is striking. While in 2008 and 2009 the United States experienced bank failures, bailouts, and the worst recession since the 1930s, Canada had no bank failures, no bailouts, and its recession was less severe than either that of the early 1980s or early 1990s.’
Source National Bureau of Economic Research
(An American Institution)
Not surprisingly, in an environment where over US 600 banks failed and members of the Fed were literally screaming at
bank CEO s (and sleeping at the Fed) the Canadian govt took steps to shore up its banks.
The total assistance was 114 billion. A large part of this ( 70B) was done by way of the banks selling mortgages to the govt
insurer CMHC. Since most of these were insured by CMHC anyway, its net risk hardly increased. But it took them off the banks’ books. However they no longer got the income and CMHC made 2.5 billion from the deal.
I love Poloz and every other “woe is you” establishment crank who bemoans savers being ripped off….and then does absolutely nothing about it (even though he actually can)…but then just juice the economy with cheap money….once again…
If you think things are getting bad in Canada now in Real Estate , just wait until we get a thaw (nasty cold across the country now) and every seller who pulled their homes off the market last fall, waiting for better times in the Spring (or the price the neighbour got a couple of years ago), put the For Sale signs back up. Yes, Spring is Coming…..
Not a Spring Thaw, then, but a Spring Meltdown? Green shoots nipped in the bid by a flood of offers?
There is a seasonal aspect to the market. The Toronto averages are up 80,000 dollars in the last month, after being down 110,000 since mid-October. Between mid September and mid October they were up 110,000!
>>>
Anyway, Central Banks react, they don’t direct. They’re behind the curve.
Remember 2008, or any other crash year/recession year. “Nobody” saw it coming, except the tin-hat guys who are more often right. The reason, of course, is that you don’t keep your job by telling everyone there’s a potential problem – you pretend it’s a surprise after it happens, and ‘fix’ it by printing money or jacking interest rates through the roof to stop the inflation you created. Everything is sunshine and lollipops until it isn’t.
Central Banks are not needed as all they do is inflate the money supply and force people to buy, as tomorrow prices will be higher. The ideal we have freedom to choose is a myth. True freedom comes when one can avoid being sucked in by the predatores. Losing 5-10% a year on your money is better than being stuck with a house that is underwater for tens of thousands of dollars.
Once a Central Bank needs untralow or negative interst rates it is a sign the demand for loans is low. There is only an illusion or a delusion, housing prices rising means you have acquired wealth. 2008 should have woken everyone on this illusion, delusion.
If you think you made money on a house you bought in 1980 because you sold it for a profit, means you do not understand anything about inflation or housing. As you house rose in value so did your healthcare costs, giving you an illusion you made money on that house.
Illusion, yes. “In economics, money illusion, or price illusion, is the tendency of people to think of currency in nominal, rather than real, terms.” – Google
Perhaps it’s time to take these people to task for saying things like “debt doesn’t matter” and “We will normalize rates once unemployment reaches X” Wow, really… it seems to me you waffle every time and steal from the prudent.
Excellent article, thanks for the reporting!
I like this statement from the Monetary Authority of Singapore:
“Macroprudential measures in Singapore have centred on the property market, as its stability is closely linked to that of the macroeconomy and the financial sector. Residential property is the single largest component in household balance sheets – it represents about half of total household assets, and housing loans account for three quarters of total household liabilities. Property-related loans also account for a considerable share of bank lending. Adverse developments in the residential property markets could consequently have serious implications for the soundness of household finances, the banking system and the broader economy. Macroprudential measures have therefore been implemented in Singapore to safeguard financial stability and encourage financial prudence.”
End result: Singapore housing market fairly valued: UBS
Poloz cut the Bank of Canada rate twice in 2015 at a time when the Chinese stepped up their home buying into overdrive. In retrospect Poloz is responsible for the demise of Canada. The oil industry died so Poloz’s two interest rates cut did nothing except drive the cost of housing beyond affordability for all locals except the Chinese locals and the Chinese foreigners.
China and Japan have printed trillions of US dollars in their own currency for the past 10 years since the global financial crisis in 2007. Its was funny and unusual they did not experience high inflation.
They also have very large trade surplus with the US.
So if US Fed interest rate goes up to above 3%, China and Japan will be in deep trouble.
So interest rate will be near zero for a very long time.
Economics is much like physics…
For every action, there is an equal and opposite reaction.
Hence the “stimulus” effect of low rates creates more debt, debt which is encouraged….and debt is future consumption denied. Borrowing from the future to pay for the present….works for a while. I just hope Janet Yellen is open for questioning when her past antics and theories crumble.